The weekly trade report, by L.C.
President Trump and his supporters hailed last week’s three trade events as vindication of the president’s protectionism. These consisted of:
- US knee-capping of the World Trade Organization’s Appellate Body (its dispute-settlement court),
- the US-Mexico-Canada Agreement (USMCA), and
- a first-phase China agreement.
The actual benefits of the three trade agreements are not so clear, although the momentary calm is to be savored.
1st trade event: knee-capping the AB
As had been long anticipated, the WTO Appellate Body became dysfunctional on December 11th. This is the WTO’s worst crisis in its 25-year history because it means that any country losing a complaint brought against it will be able file an appeal that will go to a no longer functioning court and die there.
There is, though, widespread concern that the Trump Administration is taking the global system back to the time before the WTO when, under the GATT system, there was no binding dispute settlement and larger, stronger economies easily prevailed in disputes. To the extent the US wants to be able to wield tariffs or the threat thereof to force concessions from others, including voluntary export restraints, or protect favored domestic sectors, it won’t be open to settling the AB impasse. The fact that US Trade Representative Lighthizer has in the past expressed a preference for the GATT system reinforces this worry over what the EU this week called the danger of “slipping into power-based economic relationships,” contrary to the WTO’s rules-based global trading system.
But the US is not clearly the winner in this new situation. The “law of the jungle” to which global trade might revert does not leave all the cards in US hands. The interest of major US trading partners in quickly crafting an alternative to the AB, and, notably, the EU’s decision to forge stronger trade defenses clearly aimed at the US, show that US unilateralism will face powerful resistance.
Meanwhile, a bipartisan group of House members led by pro-trade Democrat Ron Kind (D-WI) submitted a resolution calling for the administration to work cooperatively within the WTO but also supporting the administration’s goal of reforming the AB and the WTO.
2nd trade event: the USMCA and its last-minute glitch
The USMCA implementing bill was submitted to Congress in final form on December 13th. It reflects changes necessitated by the takeover of the House by Democrats in November 2018. The administration could have made an effort to submit the bill to the House while it was still Republican but didn’t. This made it necessary to incorporate various labor impositions on Mexico demanded by Democrats and organized labor in order to get their approval. One of these buried in the USMCA protocol apparently called for five US officers to be able to visit Mexican factories to make sure Mexico is complying with USMCA labor requirements. But from the very beginning of USMCA negotiations Mexico had strongly insisted – rightly – that this would be an infringement on its sovereignty. Mexico says that the offending provision was spirited into the Agreement’s protocol unbeknownst to them.
Whether this last minute glitch can be amicably resolved remains to be seen, but the US should accept Mexico’s objection and move on. If the Democrats refuse to vote on the final bill because of this, they risk bearing the blame and damaging US-Mexican relations. This wouldn’t help the Democrats with their Hispanic voters in the US.
Whatever the outcome, already the changes that the administration has agreed to in order to make the deal palatable to organized labor represent a ground-shift in US trade policy. The USMCA is different from previous US and other countries’ trade deals insofar as overall it doesn’t create an environment of greater free trade than before. Instead, it imposes more government-directed, regulatory constraints on trade. An editorial in the December 16th Wall Street Journal summarizes: “New Nafta is worse than the old deal but is at least a political relief.”
By contrast, a White House spokesperson, adopting the administration’s trademark understatement, called it “the biggest and best trade agreement in the history of the world.” Sens. John Cornyn (R-TX) and John Thune (R-SD), however, were critical of the compromises made with organized labor, and many Republicans objected to the removal of protection for biologic drug patents.
3rd trade event: a first phase US-China deal
On December 13th the US and China reached a “phase one” trade deal that let President Trump suspend the 15% tariffs that were to take effect on December 15th on about $157 billion of imports from China. The 86-page text has not been released so details aren’t entirely known. The USTR does say that the deal “requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange,” but the information provided in a December 13th fact sheet is vague. Therefore, many observers assume the agreement is mainly a trade-off of some tariff relief for China matched by some increases in Chinese purchases that have long been on the negotiating table.
The modest deal may turn out to have been mainly a public relations “bennie” for both the Chinese and US leaders. Communist Party general-secretary Xi has been under pressure from within his own party for getting China into a punishing trade war with the US and facing the hostility of the rest of the world (and some of its sports stars) over Xi’s suppression of Hong Kong’s freedoms and Xinjiang’s Muslim Uighurs. Trump meanwhile needs something positive to show farmers. China used to be US farmers’ second largest export market; now it’s dropped to fifth. Farmers are wondering whether they’ll ever get those markets back.
The agreement isn’t expected to divert the two economies from their current path toward at least some economic divergence and decoupling, as the US tightens investment restrictions and export controls on China and China works to end dependence of its tech sector on US inputs and its exporters on the US market.
Though a text wasn’t released and probably won’t be until the US and Chinese presidents are ready to sign it – probably, according to Lighthizer, in early January in Washington – the USTR released a statement along with the fact sheet. It said that: “The US and China have reached an historic and enforceable agreement on a Phase One trade deal that requires structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange. [It] also includes a commitment by China that it will make substantial additional purchases of US goods and services in the coming years. Importantly, the agreement establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement. The US has agreed to modify its Section 301 tariff actions in a significant way.”
Postscript and summary
President Trump, after making the jolting announcement last week that “effective immediately” he would restore Section 232 tariffs on steel and aluminum imports from Brazil and Argentina, has not carried out that threatened move. It is now merely “still under review.” Wiser heads seemed to have prevailed. The president apparently acted out of pique in learning that the two Latin American countries’ had captured much of the former US commodities market in China, supplemented by his view that the depreciation of their currencies was the result of intentional devaluation. (It wasn’t.) He was probably also informed that under the Section 232 statute, it is too late to reimpose tariffs.
In the wake of last week’s three trade events, where are we now? Except perhaps in the case of the USMCA — assuming a bill can be signed that is acceptable to both Mexico and House Democrats — much trade uncertainty remains. The Trump trade wars have prolonged recession elsewhere and this is throttling growth in the US as well. Despite the steel tariffs, for example, that industry is suffering from a decline of orders from its US customers because they in turn have seen their foreign customers pull back in the face of worldwide economic uncertainty. This in turn has sunk the president’s promise of 4% growth, which could have occurred if the president had endeavored to curb China more skillfully by enlisting allies rather than making trade war on them as well.
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