Vice-ministerial level US-China trade talks resume; outcome uncertain

Trade correspondent L.C. writes: In a potential breakthrough in the US-China trade standoff, Beijing accepted Washington’s invitation to hold vice-ministerial level talks. There is speculation that the White House would like to be able to announce some resolution or at least major progress in the talks with China before the early-November mid-term elections. This will especially be the case if the White House isn’t able to conclude the NAFTA renegotiation before then. Nevertheless, the outcome for both remains uncertain.

The Chinese are wary of new talks with the US. The leadership was burned when it made concessions on purchasing more soybeans, LNG, and other US exports — only to have President Trump reject the deal. China also isn’t certain if any US negotiator has the authority to make offers that will be accepted, besides President Trump. There are also reports from the Chinese elite’s recent summer gathering at Beidaihe that Chinese President Xi came under pressure for mishandling the trade relationship with the US, so he will be treading carefully.

Nevertheless, China is eager to cut a deal to end the intensifying tariff fight, which is hurting its already weak economy. The US economy is also suffering from the tariffs and foreign retaliation. While it isn’t clear that the President recognizes this, members of Congress are expressing growing alarm as businesses and farmers report losses, layoffs, and shutdowns, with potential political ramifications.

It would probably be difficult for the US to accept another offer of increased Chinese purchases of US exports and a promise to try to cut the bilateral trade imbalance that isn’t coupled with major Chinese reforms:

• Improving IP protection — beneficial to China’s own development in the longer run;
• Relenting on forced technology transfer — enabling more foreign investment; and
• Reducing China’s counterproductive industrial subsidies and protection for failing companies.

But the weak economy has spurred the government in the opposite direction, once again offering cheap loans and subsidies in an effort to counter the depressing effects of the tariffs and to paper over China’s bad-loan and over-investment problems. So it is not clear if a deal allowing the Trump Administration to declare victory and go home will be feasible.

The Chinese delegation will be headed by Vice Commerce Minister Wang Shouwen, – a comparatively low-level official. He will be in Washington August 23^rd-24th. That is when the second tranche of US Section 301 tariffs, on $16 billion in Chinese exports, takes effect and during the US Trade Representative’s (USTR’s) hearings on the third tranche, which will affect $200 billion in Chinese exports.

Expectations for the upcoming talks are also low because USTR Lighthizer’s full attention is supposed to be on NAFTA, at least if he wants to meet his end-month deadline. The US side of the China talks will be led by Treasury Undersecretary for International Affairs David Malpass, who doesn’t have trade negotiating or China-policy responsibility or experience. So there won’t be anyone with decision-making authority in the room. The best result would probably be an agreement on a schedule for resuming higher-level talks, to lead up to a Trump-Xi summit that would likely be the venue for finalizing a deal enabling the lifting of the tariffs from both sides.

Despite reports that the US as well as China is seeking a way out of the mounting trade confrontations, the President himself signaled this week that he remains committed to using tariffs not as leverage to win mutual free trade but to punish trading partners for “taking advantage” of the US and to enable the US to come out on top in its trade dealings.

NAFTA still stalled, successor likely to be more protectionist

President Trump continues to claim that his Administration is making great new trade deals, but he has yet to back up this baffling assertion. The only trade-related deals his Administration has completed are the protectionist (and WTO-illegal) metal voluntary restraint agreements (VRAs) with Brazil and Argentina. With South Korea, minor revisions to the Korea-US trade pact (KORUS) have yet to be finalized, and in any event they are, like the VRAs, protectionist rather than liberalizing. They extend for 20 years the high US 25% truck tariff and slap a quota on Korean steel. The agreement to talk some more with the EU has yet to show any signs of heading toward a trade deal. The two sides haven’t even agreed on whether farm trade will be included in their talks. NAFTA 2.0 remains to be finalized and if and when it is, it will contain more protectionist provisions than the original.

The US and Mexico met at the ministerial level for the fourth straight week for NAFTA renegotiation talks that excluded Canada. Roiling the auto discussion is a particularly serious matter: the recent US demand that President Trump be allowed to impose Section 232 tariffs on Mexican and Canadian vehicles that don’t meet the new auto rules-of-origin or are made in new manufacturing plants in Mexico. The demand that cars would face this high tariff just for being built in a new factory in Mexico makes clear that the demand is part of the Trump Administration’s push to force manufacturing away from Mexico and into the US. The restructuring of automotive supply chains that the US is seeking will be highly controversial in Mexico as well as the entire North American auto industry — since it will make the industry less competitive globally.

President Trump wants to have a revised NAFTA done before the November 6th midterm elections so he can tout the success of at least this part of his trade policy and quell the concern of farmers and businesses that the pain they face from his tariffs and the retaliatory tariffs they provoke will come to an end.

Farm incomes down, economists expect net job losses from tariffs

Meanwhile, as a result of foreign retaliation against the 232 and 301 tariffs — largely from China, the EU, Canada, and Mexico — the price of major US farm commodities dropped in July by 5.3%, led by a 14% fall in soybean prices. US net farm income is projected to be the lowest in over a decade this year. A paper and blog post by economists at the New York Fed got a lot of attention for predicting that the tariffs won’t cut the US trade deficit but will instead make US goods, including exports, costlier by raising the price of manufacturing inputs; this will cause a fall in capital investment. Most economists also argue that the tariffs will cost jobs and a high price for each job saved in the steel and aluminum industries.

Click here to go to the previous Founders Broadsheet (“Second tranche of US-China tit-for-tat tariffs goes live in ten days”)