Wednesday (11/22/2017) A hideous and desolate wilderness, full of wilde beasts and wilde men

The Wall Street Journal famously reprints every year the day before Thanksgiving an extract from the year 1620 record of the Plymouth Colony upon leaving the Netherlands for the New World. There would be “no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour…it was winter…what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men?”

Fade camera to the continental and island empire that is the United States in the year 2017. Whence come the provisions making the dining tables of the nation groan tomorrow with its rich repast?

Answer: The extraordinary productivity of US agriculture and its livestock industry, together with the bounty of season-annulling world trade in foodstuffs.

Cato celebrates NAFTA’s contribution to this bounty:

“The top consumer oriented imports from Mexico in 2016 were fresh vegetables ($5.6 billion), other fresh fruit ($4.9 billion), and wine and beer ($3.1 billion). From Canada, the top imports were snack foods ($4 billion), other consumer oriented products ($2.6 billion), red meats ($2.2 billion), and processed fruits and vegetables ($1.4 billion). In addition, in 2016, the U.S. imported $25.8 million in live turkeys in 2016, with 99.9% coming from Canada (the rest are from France).  

“The United States exports a lot to Canada and Mexico as well, which rank 2^nd and 3^rd for U.S. agricultural exports (China is the top export partner). U.S. agricultural exports to its NAFTA partners grew from $8.7 billion in 1992 to $38.1 billion in 2016, while imports grew from $6.5 billion to $44.5 billion. It is no wonder, therefore, that U.S. farmers and others in the agricultural industry greatly support NAFTA, and don’t want to see it scrapped.”

This provides an appropriate context for our introducing the first of what we plan to be weekly reports on trade and its progress or setbacks here and abroad. This will make today’s Founders Broadsheet longer than usual, because we have some catch-up to do on this important but not widely understood subject. Our trade correspondent in the Washington capital writes:

NAFTA:  5^th ROUND LOW-KEY, AS NEW US NAFTA GOALS RELEASED  –  The 5^th round of the NAFTA renegotiation has just completed in Mexico City.  It began with two days of working-level talks, 11/15-16, and then switched to the chief negotiator level, 11/17-21.  The ministers had planned to come at the end, as in previous rounds, but that was cancelled, as this round has kept to a low-key, uncontentious script, at least until the last two days.

THE ROUND:  As the 5^th round got under way, Mexican officials reported that they will not take up the most controversial matters on which the US tabled tough proposals in the previous round that were largely unacceptable to Canada and Mexico.  Rather, they said the focus would be on completing work on easier issues, on technical matters, and on those aimed at modernizing the pact and on which there isn’t sharp controversy.  Nonetheless, a schedule for the round included controversial issues on the agenda though perhaps for discussion and clarification rather than to begin actual negotiation. The toughest issues were scheduled to be discussed in the last days of the round, early this coming week  – including rules-of-origin on 11/20.  There was speculation that the December round also won’t see intense bargaining over the difficult issues but that those will be pushed into the new year, when negotiations are now expected to last into March.

This strategy in part reflects the desire of the White House not to create a NAFTA crisis that could negatively impact congressional action, especially in the Senate, on the tax reform bill.

Mexican Economy Minister Ildefonso Guajardo said Mexico would put forward counters on the auto rules-of-origin and sunset provisions, telling reporters the responses would be based on input from industry, and “the three sides would explore what scope there was for narrowing their positions on that basis.”  This should clarify how much flexibility the US side is willing to show, and Guajardo added, “It’s one thing for them to say ‘we want 85% regional value’ and another for them to explain how to achieve that technically, understanding how the industry works.”

This Mexican tactic could force more flexibility from Washington since the US auto industry has declared the US-proposed rules-of-origin (ROO) demands to be unworkable and injurious.  But on the other hand, the US has shown no indication thus far of being willing to back down.  In fact, Commerce Secretary Wilbur Ross, speaking at a Wall Street Journal symposium on 11/14, perpetuated the Administration’s hard line:  “I would certainly prefer them to come to their senses and make a sensible deal. In any negotiation, if you have one party that is not in fact prepared to walk away over whatever are the threshold issues, that party will lose.”

Canada is reportedly preparing a new tactic for the 11/20 discussion of automotive rules-of-origin, put together in consultation with the auto industry.  They plan, according to Canadian press accounts, not to offer any counter-proposal but to give the US negotiators a presentation on how the US’s ROO proposals would devastate the US’s own auto industry, showing that the US proposal is unworkable while it would do nothing to further the US’s stated goal of boosting the auto industry and bringing manufacturing back to the US.

Also, Canada and Mexico said this week they would be willing to discuss the US “sunset” proposal – that the pact would have to be renewed by each government every five years – but in the form of a provision that would call for a review every five years, not an automatic termination if all three countries don’t act to renew it.  This appears to be something the Administration could accept, and in fact in the new negotiating goals, the language on the sunset clause says:  “Provide a mechanism for ensuring that the Parties assess the benefits of the Agreement on a periodic basis” – a much less harsh goal than the original sunset proposal.

Ross also used his 11/14 speech to dismiss the concerns of the broad array of US interests that have expressed alarm about a possible NAFTA collapse, saying, “As one special interest group… gets nervous, they start screaming and yelling publicly. They start writing letters, soliciting the Congress people…. It just complicates the environment and, frankly, makes the negotiations harder.”  These remarks disrespecting the role of private interests in helping to shape commercial policy are out of the mainstream for US politics – and out of the mainstream of the First Amendment, which guarantees the right “to petition the government.”  They won’t be welcomed by the private sector and may spur companies and associations to even more active pro-NAFTA lobbying, which has in any event continued to intensify as the renegotiation proceeds.  Moreover Congress could react:  it wants the Administration to take account of private sector input in trade negotiations.  On the other hand, Ross’s remarks do suggest that the lobbying and letter-writing that has been going on non-stop to save NAFTA is having some effect – or at least “complicating” the Administration’s desire to threaten NAFTA.

Indicating the pressure the Administration gets from Congress, a bipartisan group of 72 members of the House, from 23 states, sent a 11/15 letter to Trade Representative Robert Lighthizer opposing the auto ROO demands of the Administration.  The group included Republicans with a free-trade orientation.  It argued that NAFTA has sparked “increased vehicle production in the US, more secure jobs for those working in the industry, and a globally competitive US motor vehicle industry that leads the world in innovation.”  Tightening the ROOs would “eliminate the competitive advantages provided to the US auto industry… or lead to rejection by Canada and Mexico and the end of the agreement,” either outcome resulting in reduced sales.

Senators also this week engaged in the sort of letter-writing that Ross disparaged.  Three Republican senators, James Lankford (OK), Mike Enzi (WY), and John Thune (SD), sent a 11/15 letter to Lighthizer criticizing the Administration’s NAFTA stance.  They objected to the sunset clause’s provision for automatic termination, and to the Administration’s focus on using trade agreements to cut the trade deficit.  On the latter point, they noted that trying to create jobs “through enacting additional barriers to trade and taxes on imports should not be the focus of US trade policy,” especially since the data show that there is at least a negative correlation between the trade deficit and US jobs-creation and sometimes there is an inverse relationship.  This is a point often raised by economists and trade analysts, but which has not been brought directly into the political debate over the White House’s trade policy.  “If,” the senators said, “the desired result of current trade agreement renegotiations is job growth, concern over a negative trade balance should not be part of those discussions.”  That is a direct rejection of the President’s fundamental views on trade.  They offered to help the Administration “toward addressing real trade issues such as expanding markets for US producers and businesses, eliminating foreign subsidies, and enforcing current trade laws.”

One important point to note about this letter and other expressions of concern from Congress over the US’s NAFTA positions is that any changes the Administration may win agreement for in the renegotiation will have to be approved by Congress – and these letters suggest it would be hard to get a majority to approve a deal that includes some of the current US demands.  It may be difficult to get any Democratic votes – among other things, they are demanding much tougher labor standards – and so broad Republican support will be needed.  In fact, there were reports from Canada this week that Ottawa believes that if an onerous NAFTA re-do is finalized, it could count on Congress to block its implementation.

THE GOALS:  The updated NAFTA renegotiation goals, released on 11/17 were more detailed than the original list (see our Report of 7/23/17), but there were no big surprises as the changes largely reflected demands the US has put forward in the talks.  Seventeen pages long, the goals were divided into 20 chapters.  The basic but controversial goal of lowering the trade deficit with Mexico remains (with Canada, the US has a small goods and services trade surplus).  The first objective listed is: “Improve the US trade balance and reduce the trade deficit with the NAFTA countries.”  Here are some of the other major goals:

The most significant softening of a position was the change to the sunset clause, calling for a periodic review but not a requirement for renewal.   Now the US calls for “a mechanism for ensuring that the parties assess the benefits of the agreement on a periodic basis.”

On automotive rules-of-origin, the language was still vague:  “Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the US and North America;  Ensure that the rules of origin incentivize production in North America as well as specifically in the US.”

On agriculture, the goals incorporate the recent Administration demands for more access to Canada’s diary and poultry markets – essentially ending supply management (the US also calls for cracking down on import and export monopolies).  And for Mexico, they include the new demand for changes to antidumping laws to facilitate complaints by seasonal produce growers (see our last Report):  “Seek a separate domestic industry provision for perishable and seasonal products in AD/CVD proceedings.”  Also on unfair trade measures:  “Eliminate the NAFTA global safeguard exclusion so that it does not restrict the ability of the US to apply measures in future investigations” – that is, enable the US to always apply safeguards to Canada and Mexico.

On government procurement, the US seeks reciprocity, a tough objective.  (Among other problems, Canada’s federal system makes this issue almost impossible.)

The US to limit Mexican truck access.

The US seeks to limit liability for online services like Google and Facebook, that is, when users of these services violate intellectual property of copyright-holders, the services shouldn’t be liable – a controversial proposal opposed by US entertainment and software companies though not necessarily a proposal that Mexico and Canada cannot accept.

Also on intellectual property – patents (including test data), copyright, trademark, and trade secrets protection – the US wants generally equivalent standards.

KOREA LARGELY WINS WTO RULING VS. US OCTG DUTIES  –  The US largely lost a mixed ruling by a World Trade Organization (WTO) dispute settlement panel in the case brought by South Korea against US antidumping duties on its Oil-Country Tubular Goods (OCTG).  The 11/15 ruling, if not changed on appeal, would require the US to recalculate the duties, lowering them.

Koreans’ anger over the OCTG duties.  The Koreans argue that the surge in US imports of OCTG stemmed from the increase in US demand due to the fracking/petroleum production boom, which coincided with a hike in US duties due to unfair trade cases targeting steel.  Since steel is a key OCTG input, it forced up the price of domestically-made OCTG, making imports more competitive – through no fault of the Koreans.

Seoul thinks that it is being unfairly treated by Washington and that benefits its exports won through the US-South Korea Free Trade Agreement (FTA) are being nullified by US unfair trade measures, which are imposed using faulty and unfair methodology.   OCTG is a major Korean export to the US, valued above $831 million in 2012, the year before the AD duties were set.  The WTO ruling will support this Korean view and provide a basis for pushing back in the (Korean-US) KORUS renegotiation against US charges that the Koreans have failed to implement some of their commitments, charges that most observers believe have merit.

OTHER DEVELOPMENTS TO NOTE

CANADA TAKES LUMBER CASE TO NAFTA  –  Canada filed a complaint on 11/14 with NAFTA dispute settlement over the US countervailing duties imposed on Canadian softwood lumber.

In announcing the NAFTA filing, the Canadian Foreign Ministry said that the US Anti-Dumping/Countervailing Duty (AD/CVD) decision “is unfair, unwarranted, and deeply troubling” and “we will forcefully defend Canada’s softwood lumber industry, including through litigation, which we are launching today.”

This NAFTA filing is a reprise of past events in the long US-Canada dispute over softwood lumber.  The lumber clash goes back to the 1980s-90s, and continued after 2000, as we note above, with US duties being challenged by Ottawa, largely successfully, under NAFTA Chapter 19 (which sets up a binational five-judge panel to review AD and CVD duties imposed by one NAFTA country on another), at the WTO, and in US courts.

The initiation of a NAFTA case is a controversial move because not only will it intensify general tensions in the NAFTA talks, its use of Chapter 19 highlights Canada’s opposition to the US proposal in the renegotiation to eliminate Chapter 19 dispute settlement from the agreement.  Mexico has sided with Canada in wanting to retain Chapter 19.

UNFAIR TRADE ACTION:  HARDWOOD, BIODIESEL – In addition to the mixed WTO panel ruling in South Korea’s complaint about US oil-country tubular goods duties and Canada’s challenge to US softwood lumber duties (see above), there were other developments regarding US unfair trade actions this week.

HARDWOOD:  In the high-profile AD/CVD case targeting imports of hardwood plywood from China, Commerce announced on 11/13 “its affirmative final determinations.”  It set final antidumping duties of 183.36% for all suppliers (based on adverse facts available).  It set final countervailing duties of 22.98% and 194.90%.  Both the AD and CVD rates were higher than in the preliminary determinations – in the case of some companies, much higher.  Commerce also found “critical circumstances” for some Chinese suppliers in both the AD and CVD investigations, so those duties will be collected 90 days retroactively.  The ITC is scheduled to take its final injury vote around 12/21.

The case has a high-profile because this is a huge import, valued around $1.12 billion last year – and also because it is yet another trade action that raises the price of a material basic to the home-building industry (others being softwood lumber and steel rebar), which is already suffering from a labor shortage amid increased demand due to natural disasters.  The product in this case is hardwood and decorative plywood, and certain veneered panels.

The lead petitioner is the Coalition for Fair Trade in Hardwood Plywood;  its attorney declared the group “extremely pleased” with the final duties.  From the defending side, a coalition of home-builders and other makers of wood products was “outraged,” charging, “These rates are based purely on politics, not on any type of marketplace reality.  Unfortunately, hundreds of thousands of American workers will pay the price in lost jobs.”  The group added, “We remain confident that the ITC will keep its eye on the facts and law before it,” referencing a previous case against Chinese hardwood in which Commerce found unfair practices but the ITC reversed itself in its final ruling to find no injury or threat.  In that case too, hardwood plywood users had formed a coalition that argued that many of the targeted products aren’t available domestically and a hike in the price would cost the US jobs (see our Report of 11/10/13).

The wood users also charged that the Administration delayed the announcement of the duties until after the President’s trip to China.  And in fact, the move did anger Beijing. According to Xinhua, the Commerce Ministry called the duties “unreasonable.”  It also went after the fact that the US used non-market economy methodology in this case, saying that the US “has ignored WTO obligations and commitments by continuing to use the surrogate country approach in anti-dumping investigations against China,” and “in its anti-subsidy investigation, the US side also ignored WTO rules and rulings and determined a higher subsidy level by making up subsidy programs such as offering low-priced raw materials.”  This suggests that China may be considering filing a WTO complaint.

BIODIESEL:  Argentina is contemplating filing a WTO complaint against the US duties just slapped on imports of its biodiesel (see our last Report).  Commerce Minister Miguel Braun said this week that “all options are on the table…. We do not discard the possibility of taking this to the WTO….  Really, the US ended up with… maximum sanctions that Argentina does not believe are according to international rules, because we already won a [WTO] case against the EU… along these lines” (see our Reports of 10/16/16 and 10/29/17).  Expressing disappointment, Braun suggested that the case could have led to a “more constructive win-win deal,” claiming that Buenos Aires has been flexible in meeting US demands for importing more from the US.  He said he hoped the case might become “an opportunity to deepen the dialogue” with Washington.  Biodiesel is Argentina’s largest export to the US.

EU CHANGES UNFAIR TRADE RULES, DODGES NME CLASSIFICATION FOR CHINA, SUBSTITUTES “SOCIAL DUMPING” EUPHEMISM –  The European Parliament on 11/15 overwhelmingly passed the revisions to EU antidumping rules wanted by the European Commission and recently passed by the international trade committee, INTA.

A parliament press release titled, “Parliament passes new anti-dumping rules to protect EU jobs and industry” highlighted the social aspects of the new rules:  “For the first time worldwide, EU trade rules will require trade partners… to meet international social and environmental standards, so as to prevent dumping.

Despite the emphasis on social dumping (which might be challengeable at the WTO depending on how it is implemented), the press release made clear that China/NMEs are still a key focus:  “EU jobs and firms have great difficulty in competing with cut-price imports from third countries that have excess production capacity and subsidized economies, mainly in the steel, aluminum, bicycles, cement, chemicals, ceramics, glass, paper and solar panels industries. The new rules would enable the EU to respond to such unfair trade practices by targeting imports where prices are not market-based, due to state interference.”

RCEP:  LEADERS MEET, REPORT NO BREAKTHROUGHS, CONFIRM PUSH TO CONCLUDE NEXT YEAR – Leaders of the 16 countries negotiating the Regional Comprehensive Economic Partnership (RCEP) met, for only the second time, on 11/14, on the sidelines of the East Asia Summit near Manila (see our last Report).  Ministers have met five times, and 20 negotiating rounds have been completed since talks were launched in 2012. China is a member of RCEP.

It does not appear that there was major RCEP progress at the leaders’ gathering, though recent rounds have reported some movement (see our Report of 10/29/17).  What was new this time is the breakthrough in the Comprehensive Progressive Agreement for the Transpacific Partnership (CPTPP). This was formerly known as TPP-11, a name given to the Transpacific Partnership after the Trump administration  removed the US from what was originally a twelve-nation pact but is now eleven.

The (CPTPP) talks that signals that a deal may be reached next year that creates an incentive for China to find compromises that could bring the RCEP to fruition more quickly. China doesn’t want the CPTPP to be the only regional bloc setting standards.  Other RCEP members not in the TPP may be similarly motivated.  On the other hand, countries in both sets of negotiations are likely to prioritize the CPTPP, taking momentum away from RCEP.

PRESIDENT TRUMP’S TRIP AND AFTERMATH

None of the countries President Trump visited recently showed eagerness to launch bilateral FTA talks, the linchpin of the President’s Indo-Pacific trade strategy.  That includes Japan.

Meanwhile, the Democrats have begun assailing the President’s failure to find FTA partners.  Senate Finance Committee ranking Democrat Ron Wyden (D-OR) released a statement saying, “This Administration has spent nearly a year dithering and still lacks any serious strategy for engagement with Asia in order to open those markets.”  Instead, he said, US exporters will lose market share in the region, including to Canada and Mexico, because “these 11 nations moving forward without the US will create an incentive for American manufacturers to move production to Mexico in order to access consumers in the Asia-Pacific.”  The charge that the President’s own policy will push manufacturers to move to Mexico is serious indeed from the standpoint of the White House, and it ties the Democrats to huge swaths of the US business and agricultural communities that have the same concern.

ESRC MAKES ITS ANNUAL HARDLINE RECOMMENDATIONS ON CHINA POLICY  –  The US-China Economic & Security Review Commission (known as the USCC or ESRC) released its annual report on 11/15, calling, as usual, for toughening many aspects of US policy toward China.  Also as usual, the report was about 600 pages long.

In line with the US government and corporate view in recent years, the report says China is retreating from liberalization, imposing protectionism and restraints on US companies operating in China, noting that surveys of US companies confirm this. Still, US services exports are rising, though this sector also faces increased restrictions and discrimination, including data localization rules.  Yet there are opportunities for US companies, as the middle class grows, along with e-commerce and domestic demand.

One high-profile recommendation is a repeat from last year, namely,  to prohibit “the acquisition of US assets by Chinese state-owned or state-controlled entities (SOEs), including sovereign wealth funds.”  It would have the Committee on Foreign Investment in the US (CFIUS) continue to scrutinize all proposed acquisitions by private Chinese companies, but would ban outright any purchases by state-owned or controlled entities.  The report charged that China aims its foreign direct investment at “industries deemed strategic… including information and communications technology, agriculture, and biotechnology,” with purchases that “lead to the transfer of valuable US assets, intellectual property, and technology to China, presenting potential risks to critical US economic and national security interests.”  Meanwhile, in response to Beijing’s efforts to staunch financial outflows and corporate debt, “investments in nonstrategic sectors like entertainment, real estate and hospitality are declining.”

Moreover, Chinese SOEs functioning in the US can invoke their government connection to escape liability.  And:  “The opaque nature of China’s financial system makes it impossible to verify the accuracy of Chinese companies’ financial disclosures and auditing reports.”   Chinese entities, the report charged, are setting up shell companies and in other ways “are becoming more sophisticated in their attempts to circumvent” CFIUS reviews and other investment regulations.

The recommendation and the arguments backing it up should give further support to legislation beginning to move through Congress to reform CFIUS with the goal of better controlling China’s efforts to gain US assets.

Other recommendations include inviting Taiwan to participate in military exercises with the US, and to renew the 1992 US-Hong Kong Policy Act – both proposals alarming to Beijing.  On Hong Kong, it says the One-Country-Two-Systems framework has been “called into question” as the territory loses its “unique characteristics and legal protections that make the territory a key US partner” in the region.

The report also warns that “China is pursuing a range of advanced weapons with disruptive military potential” – listing six types of weaponry – that it could use to defeat the US in a future battle.  And the report cautions the US government not to expect much cooperation from Beijing on North Korea.  “The US and the international community should keep their expectations low, given China’s lackluster record of previous sanctions enforcement and continued sanctions violations by Chinese companies exporting dual-use items to North Korea.”

 

Click here to go to yesterday’s Founders Broadsheet (“German Chancellor Merkel a spent force”)