Trump administration split over goal of tariffs vs Chinese imports

L.C.’s weekly trade report follows.

Diminish Chinese trade surplus or its hi tech industrial policy?

April 10th — The Trump administration is internally split regarding the goal of its $50 bn. in threatened Section 301 tariffs against Chinese imports. Some officials want to win concessions from the Chinese that would bring down the bilateral trade imbalance. The President himself has said that he wants that balance lowered by $100 billion. But others in the administration want more fundamental changes to the Chinese economy — to orient it away from state capitalism and assure meaningful protection for intellectual property. The New York Times puts Treasury Secretary Steve Mnuchin and Commerce Secretary Wilbur Ross in the former camp and Robert Lighthizer, the US Trade Representative (USTR), and Peter Navarro, Director of the White House National Trade Council, in the latter.

Some worry that the lack of unity could provide an opening for Beijing to make a deal that offers less than a real solution to the problems identified in the Section 301 report. Many free traders outside the Administration are more in line with Trump’s protectionist advisers, Lighthizer and Navarro. They share a fear that the President will settle for short-term measures that might show a brief downward blip in the trade deficit while doing nothing to reverse China’s state-capitalist practices that endanger the US high-tech sector.

Reports late last week that the US and China were already negotiating turned out to be inaccurate or at least premature. Beijing denied that talks were taking place, and US officials could not confirm any engagement. National Economic Council Director Larry Kudlow, uncomfortable with the President’s unilateral trade moves, at first suggested talks were underway but then had to backtrack. Today, however, Chinese President Xi Jinping “promised increased imports, accelerated access to China’s insurance and other financial sectors, greater protections for intellectual property, and lower tariffs and reduced ownership restrictions for foreign car makers….Markets surged following the remarks,” the Wall Street Journal reports.

$100 bn. US retaliation?

Major US business associations earlier in the week criticized the US $50 bn. in Section 301 tariffs — and the President’s threatened $100 bn. in additional tariffs after China warned it would match the US $50 bn. The business associations urged the US to seek a dialogue with Beijing immediately. Most of the associations called for working with allies to pressure China, and they decried unilateral US actions that they warned would harm the US economy. The National Association of Manufacturers (NAM) said the US goal should be conclusion of a bilateral trade agreement with China that resolves the problems identified in the Section 301 report. Agricultural groups were particularly outspoken, expressing alarm at the “devastating” prospect of losing the Chinese market. By the end of the week administration officials were trying to calm the alarm, signaling that a trade war wasn’t imminent and that the administration goal was a negotiated solution.

But if the US did impose an additional $100 billion of 25% tariffs on imports from China beyond the $50 billion already in the works, China would have trouble responding proportionately:  The US exports less than $150 bn. in goods to China each year. Nevertheless, China is the US’s third largest export market — a point of vulnerability for the US in any bilateral trade war. Also, Beijing could resort to other damaging kinds of retaliation:

• Making it more difficult for US companies to operate in China using discriminatory laws and regulations, intensified scrutiny, and other harassment techniques;
• Making it more difficult to export to China by imposing regulations such as safety and health inspection;
• Unleashing a boycott of US products, like the damaging boycott of South Korean goods that followed that country’s anti-ballistic-missile (THAAD) deployment;
• Blocking the export from China to the US of critical inputs, such as rare earths;
• Dumping Chinese holdings of US Treasuries; and
• Refusing to rein in North Korea.

Japan joins US WTO case against China

Japan submitted a request to the World Trade Organization (WTO) that it be allowed to join the US WTO case against China, targeting China’s licensing practices relating to intellectual property that violate the GATT and TRIPS (intellectual property) agreements. On April 4th the European Union (EU) made the same request, joined by some other countries. This is important because Tokyo and Brussels, along with many people and organizations in the US, have been calling for such cooperative action among the three countries using the WTO to tackle China’s abusive practices. It raises the question why Washington didn’t seek to file a joint complaint against China in the first place, as it would likely have been a stronger case and removed the perception that the US was acting unilaterally. It is nonetheless important that these allies are participating in the US case despite the fact that the US separately imposed tariffs on them through Section 232 – and despite efforts by China to isolate the US by urging other countries to join it in fighting against US protectionism.

Latin America

The 8^th Summit of the Americas in Lima, Peru will take place on April 13th-14th. This is an event that takes place at the head of state level every three years. President Trump was to have attended, but the White House announced today that he must remain in Washington to deal with the Syrian crisis. Vice President Pence will attend in his stead.

The US has bilateral trade surpluses with almost all Latin American countries. The US already has bilateral Free Trade Agreements (FTAs) with many of the countries at the summit, but the Vice-President — and Commerce Secretary Wilbur Ross, who will accompany him — may be left out of many of the trade consultations, since these countries are moving toward more regional agreements, with Canada, Mexico, Chile and Peru already part of the Trans-Pacific Partnership (now the CP-TPP). The Pacific Alliance and MERCOSUR trade pacts are also actively discussing joining together and bringing outside countries into their free trade zones.

NAFTA

This week’s NAFTA developments were encouraging: the US is pushing for a near-term agreement. The deal being crafted on auto content/rules-of-origin has been in the works for about a month. It is based on a US partial retreat from its initial demand for 85% North American content and 50% US content. The US is using the Section 232 tariffs (on steel and aluminum) to prod Mexico and Canada to reach a speedy conclusion to the NAFTA renegotiation. Washington is even pushing for an agreement in principle to be ready when the three countries’ leaders gather in Lima for the Summit of the Americas. Among the reasons why the White House wants it concluded so soon: once done, under US law it will be at least six months before Congress can vote on it, and the White House is eager that it be taken up by the current Congress.

The earlier Section 232 steel and aluminum tariffs

When the President imposed Section 232 tariffs on the world in late March — 25%  on steel and 10% on aluminum — he said there would be no exemptions. That changed quickly. The tariffs took effect for China, Japan, and all others immediately but were suspended for the EU, South Korea, Canada, Mexico, Australia, Argentina, and Brazil until May 1st. This was intended to extract concessions from the latter nations in exchange for permanently lifting the tariffs. But this was a huge retreat from the President’s initial “No exemptions!” position. At the same time, the Commerce Department announced a process for US metal-using companies to petition to exclude particular products from the tariffs, if they weren’t available from domestic suppliers. But the process on offer is so onerous, lengthy, and costly that it is unclear whether US manufacturers will get much relief from it.

The strategy had its first outcome with the March 26th announcement that the US and South Korea had finished amending the US-South Korea Free Trade Agreement (KORUS). The US will remove the tariffs on Korean steel in exchange for a voluntary Korean export quota. Seoul added a few concessions that Washington had sought, most significantly in extending by 20 years the 25% US truck tariff that formerly was to phase out in 2021, and the inclusion of a currency anti-manipulation clause. But the US conceded more, dropping its most significant demands: that Korea end its remaining tariffs on US farm goods and that it accept US content requirements for autos shipped to the US. This raises the question of how seriously other countries should take US demands in future negotiations.

Administration’s “small ball” endgame for allies: voluntary export quotas

So now the administration strategy is clear: to win voluntary export restraints on steel and aluminum. This approach, which hearkens back to 1980s trade policy, has a problem: WTO rules explicitly forbid voluntary export restraints. Perhaps Washington can get around this by declaring that the US is the one imposing the quotas and that they are justified under the WTO’s national security exception.

But already the EU and China are challenging US use of the defense exception, filing claims at the WTO that Washington is using the tariffs for the purpose of safeguards – to protect domestic industries from competition – not national security. If the WTO agrees, the EU and China can demand immediate compensation because the US hasn’t followed the rules of the WTO Agreement on Safeguards.

But the important issue remains whether the US and its allies can thwart Beijing’s Made in China 2025 plan to achieve dominance in the advanced technologies that it has copied or stolen from the West. The fear is that the Administration will strike a bad deal — a cut in China’s steel capacity, access for some services, and a few other concessions that supposedly will reduce the bilateral trade imbalance —  but won’t, in the end, restrain  the Chinese dictatorship’s  plan to dominate the dual use (military-civililian) “high tech” industries of the 21^st century.

Click here to go to the previous Founders Broadsheet post (“Winter and spring colder than usual? Here’s why”)