Administration to punish “undervalued” currencies

The weekly trade report with L.C.

The Trump administration has taken another step in a protectionist direction with the Commerce Department’s release on February 3rd of its final rule to punish “undervalued” currencies. The rule will take effect on April 6th. Other protectionist measures that are under consideration include

• exiting the World Trade Organization’s Government Procurement Agreement,
• extending Section 232 metals tariffs to downstream products,
• expanding the Committee on Foreign Investment in the United States (CFIUS)’s jurisdiction, and
• giving the government control over information and communications technology and services.

Already, the Trump administration’s protectionist trade policies have knocked 1% off US GDP, negating the president’s promise to deliver a 3% growth rate to the US economy. The effect on world trade has been no less destructive. The Wall Street Journal (Feb. 10, 2020) reports:

The two-year trade war between the U.S. and China upended commerce world-wide, slamming the brakes on global trade growth….Growth in global trade sank to a meager 1% last year, down from 4% in 2018 and 6% in 2017. It was the fourth worst showing in 40 years, and the worst ever outside a period of recession, according to International Monetary Fund data.

Protests against Commerce Dept’s currency rule

The US Chamber of Commerce argues that the administration’s proposed foreign currency devaluation rule is flawed for three reasons:

• the change requires legislation (which always failed in the past),
• there “is no agreed methodology for measuring the undervaluation… of currencies” so any determination would be “subjective,” and
• it would violate the WTO Agreement on Subsidies & Countervailing Measures and be “unlikely to withstand a challenge.”

Meanwhile, the Chinese Commerce Ministry is warning that the proposed currency rule violates the US-China Phase One trade accord and puts “at grave risk” the anticipated talks for a second phase.

Conflicting promises

During his campaign, President Trump vowed to go after currency cheats. Thus he can portray Commerce’s currency rule as fulfilling a campaign promise. But he also promised 3% growth and now has just 2%. The Obama administration during its eight years’ rule averaged 2.2%.

Making devaluation countervailable has been promoted often for almost two decades but never previously put into effect. It was promoted largely in legislation for which the present Senate Minority Leader Chuck Schumer took the lead. He introduced legislation in 2003 to slap 27.5% duties on all Chinese exports to make up for what he roughly calculated was that degree of yuan devaluation. He and Sen. Lindsey Graham (R-SC), along with House members from both parties, introduced similar bills several times since then.

Sop to special interests

None of the bills made it through both chambers, and they were generally recognized as a sop to organized labor, the steel industry, and other frequent filers of unfair trade petitions. It is suspected that individual legislators voted for the bill to please a few constituents, knowing full well the the bill wouldn’t be enacted into law and therefore the rest of their constituents wouldn’t suffer from the higher countervailing duties that would have followed. Large swaths of domestic industry led by high-tech strongly opposed the change. Many worried about foreign retaliation: after all, the US dollar exchange rate also frequently declines.

Doubling down

For the present administration to make the change without congressional approval, in the face of strong private sector opposition, opposition by trading partners, and warnings that WTO rules would likely be breached – is not only protectionist and possibly unconstitutional but also a doubling down on the administration’s failed trade policies.

Beyond China, topping the list of countries that could be hit are those on the Treasury foreign exchange “Watch List.” That includes Japan and eight other major US trading partners.

Foreign currency parity rates are notoriously difficult to assess objectively, and Wilbur Ross’s protectionist-minded Commerce Department– as opposed to Treasury – has no experience whatever in dealing with such matters.

Other developments

Section 232 tariffs taken to court

PrimeSource Building Products filed a lawsuit in the US Court of International Trade against the escalation of Section 232 tariffs to hit downstream steel and aluminum products. The Texas-based company is a global building products distributor dealing in many brands and is the leading carrier of fasteners, which are included in the new tariffs. The administration’s tariff escalation is being challenged in court since several aspects of the move appear to violate the Section 232 statute.

There are already warnings that the steel and aluminum tariff escalation to downstream products may be the first of more such steps to follow. Products using imported inputs that have been subjected to Trump’s various duties will demand that their products be protected because their costs have risen. For instance, most of the $360 billion in Chinese products that remain subject to Section 301 are intermediate goods. US manufacturers that use them as components have been suffering injury. Beyond that, trading partners hit with the new tariffs are likely to respond with retaliation, as they did to the initial Section 232 steel and aluminum tariffs.

Trump trade “win”: gain 1,000 jobs, lose 75,000

Private sector opposition to all the Trump tariffs has been intensifying as more and more economic analyses come out indicating that they are harming the domestic economy. This week a study was released by three economists showing that the initial Section 232 steel tariffs led to a gain of 1,000 jobs in the industry, but a loss of 75,000 jobs elsewhere and a decrease in investment in downstream industries.

GPA withdrawal under consideration

The White House is reportedly considering withdrawing from the WTO Government Procurement Agreement (GPA). Bloomberg News reported on February 4th that the “move that may anger close allies during a delicate moment for trade.”

The threat could be used to pressure the EU, UK, and Japan in upcoming trade talks. A withdrawal would mainly hit those three countries plus Canada and South Korea. It appears the president has decided the GPA is unfair to the US because it opens a US market worth about $837 billion, whereas the contracts open to the US by all other parties combined is only worth about the same amount. Apparently equality isn’t good enough for the president: he wants an arrangement lopsidedly favoring the US.

And the US wonders why its allies won’t honor the administration’s request to boycott Huawei.

GPA benefits to US

The GPA has two main benefits – both of which are strongly enjoyed by the US and would be lost by withdrawal. First, the US has companies that are highly competitive in many areas in which foreign governments solicit bids, and so they benefit greatly from access to those contracts. Second, opening US government contracts to foreigners keeps prices down, saving taxpayer money. A foreign company only wins a bid if it is more competitive than domestic rivals. And as is the case with all trade, the foreign competition forces US companies to improve their own competitiveness.

As the Chamber of Commerce’s John Murphy tweeted, “Thanks to the WTO GPA, US firms can bid on foreign government procurement worth about $900 billion every year on a level playing field. If the US withdraws, those governments would be free to discriminate against US companies.”

As with other US unilateral trade actions, just the disclosure that the White House is contemplating exiting the GPA is a blow to the credibility of the WTO and global trading system.

The drawbacks of sunset clauses

In USMCA news this week, presidential senior adviser Jarad Kushner published an op-ed on February 3rd at CNBC in which he extolled the value of the agreement’s controversial sunset clause. The provision that Kushner is touting as an important improvement over previous trade agreements has caused concern from the beginning. That’s because it throws uncertainty over the USMCA’s future staying power – since it can be more easily scuttled by future leaders than is the case with NAFTA or other traditional free trade agreements.

If there is any question regarding the longevity of a free trade agreement, it causes investors to be cautious in building facilities that are economical only while free trade is in effect. It brings enough uncertainty to counteract one of the key benefits of a trade deal, which is to end uncertainty over future trade relations. Perhaps most important about the Kushner article is that it suggests that President Trump will insist on similar sunset clauses in any future comprehensive trade agreement he concludes.

L.C. reports on trade matters for business as well as Founders Broadsheet.