The weekly trade report — by L.C.
President Trump unleashed new tariffs with early morning tweets on December 2nd announcing plans to punish Brazil and Argentina by imposing Section 232 [national security] tariffs on their steel and aluminum exports. “Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers,” the president tweeted. The questionable grounds of the Trump claim were suggested in a Wall Street Journal editorial:
The Argentine peso has plunged 37% this year amid hyperinflation and fears that the Peronists who won the recent election will devalue and walk away from their debt as they have so often. But since the October election, Argentina’s central bank has tightened capital controls and set a price floor under the peso. The Brazilian real has slid somewhat this year amid broader tumult in emerging markets. But its central bank has intervened to shore up the exchange rate.
Dec. 2, 2019
The Trump administration’s own Treasury Department didn’t single out either country for criticism – let alone the charge of being currency manipulators – in its latest semi-annual report on foreign currency practices.
Like the rest of Latin America, Brazil and Argentina run goods trade deficits with the US so the president can’t accuse them of taking advantage of the US, the charge he levels at China and the EU as he ratchets up tariffs on them.
Both countries had been largely exempted from US tariffs because they agreed to impose export quotas instead. Countries targeted for trade restrictions generally benefit more if they accept quotas rather than tariffs. Quotas allow the affected producers in the exporting country to raise prices in the importing country above what they charge for the same goods elsewhere, reaping the profits. Tariffs, on the other hand, raise prices and crimp sales in the importing country but the money raised stays in that country and is of no benefit to the exporters. So even if there won’t be much change in the flow of steel and aluminum from Brazil and Argentina to the US, the switch to tariffs amounts to a penalty.
Although the president said the new tariffs would take effect “immediately,” the formal documentation needed has not been released. Thus, it remains possible that the tariffs won’t actually take effect. Steel and aluminum prices have dropped this year. Pressure from the domestic industry might have spurred the president’s decision. It’s hard to see any national security justification for his decision, as legally required for Section 232 actions.
In fact, the president’s tariff threats on the two countries arguably undercuts national security. The president justifies his trade war with China by insisting that even if it harms the US economy, his goal is to shift global supply chains away from China. But imposing tariffs on other countries as he just did with Brazil and Argentina contradicts that goal since it forces them to become more reliant on trade with China while less interested in cooperating with the US in taking on China’s abuses.
Additionally, if the tariffs are imposed, Brazil and Argentina will be in a position to join the other US trading partners that have imposed retaliatory tariffs on US exports, and they can file a World Trade Organization (WTO) complaint against the US move. But the crisis in the WTO’s dispute settlement function might make that a moot point.
Conflict threatens over France’s anti-US tax, Airbus
The US Trade Representative office announced on December 2nd that it “has.. concluded that France’s Digital Services Tax (DST) discriminates against US companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected US companies.” The investigation
…found that the French DST discriminates against US digital companies, such as Google, Apple, Facebook, and Amazon [the “GAFA” companies] [and] is inconsistent with prevailing tax principles on account of its retroactivity, its application to revenue rather than income, its extraterritorial application, and its purpose of penalizing particular US technology companies.
The US is reportedly threatening tariffs of up to 100% against $2.4 billion in French imports. The threat on French products came the same day as the USTR’s announcement that the US might raise further the tariffs imposed on the EU in the Airbus dispute.
There is a broad consensus within the US that the French tax is discriminatory, protectionist, and specifically aimed at unfairly hurting the US online giants. But almost all who hold this view want the issue dealt with in the ongoing Organisation for Economic Co-operation and Development (OECD) talks that are trying to develop an international framework for countries to follow in imposing taxes on digital services. Some analysts who oppose the French tax criticized the White House for opting to use Section 301 [unjustified foreign trade actions] of US trade law rather than filing a WTO case. But WTO cases take several years to resolve – and sometime more. The Trump administration and the US tech companies didn’t want to wait, noting that Paris itself didn’t wait for the OECD talks to conclude.
The fear of the US private sector is that if France succeeds with its taxes targeting successful US companies, other countries will imitate the French. US retaliation could then be followed by foreign retaliation, starting a race to the bottom. Already French Finance Minister Bruno Le Maire is saying that Paris has talked with Brussels about EU-wide retaliation if the US moves ahead with tariffs. But he has added that if the OECD reaches an agreement and the US accepts it, Paris will reimburse the DST taxes paid. The EU has affirmed that it will support France against the threat of unilateral US tariffs but will wait to see what develops.
Majority leader Pelosi under pressure on USMCA
The United States-Mexico-Canada Agreement (USMCA) still isn’t ready to be put into final legislative form, though those involved believe an implementing bill could yet be submitted and voted on this year. (Congress is expected to remain in session until December 20th.) The main outstanding difficulties include
- a just-introduced US demand relating to the already complicated automotive rules-of-origin,
- Internet liability protection,
- the protection period for biologic drugs, and
- a US demand that its inspectors be allowed into Mexican factories.
Time is almost up if the USMCA is to be approved this year. It has to be presented for approval to Mexico and Canada and to the House Democrats, then put in final implementing bill form and submitted to Congress on a day when the House and Senate are in session. No one involved has said it is impossible to accomplish this by the time Congress adjourns on December 20th, but time is short.
USMCA’s prospects are helped by the political situation. Majority speaker Nancy Pelosi is under pressure from Democrats in swing districts who don’t want their votes for impeachment to be the last ones they take this year. They’d rather go home and stress to their constituents that they voted for the USMCA, which is favored among both Trump supporters and moderates in their districts. The week ended with a new tweet from President Trump: “Hard to believe but if Nancy Pelosi had put our great Trade Deal with Mexico and Canada, USMCA, up for a vote long ago, our economy would be even better. If she doesn’t move quickly, it will collapse.”
Still no US-China trade deal
The December 15th deadline at which the President will put 15% tariffs on remaining imports from China, worth about $157 billion a year, is fast approaching. Since both countries have economic reasons to wish to avert the tariffs – and the US president has a strong political incentive to reach a “phase one” trade deal with China and avoid the economic hit from the tariffs – a deal might happen, but it’s not a sure thing. The uncertainties in US-China trade relations have put US investment decisions on hold and prompted individual US stock investors to switch hundreds of millions of dollars out of the stock market into lower-risk bonds and cash.
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