“Crunch time” for multi-billion dollar US-EU aircraft and digital-service tax disputes; Japan joins US-Brazil proposed WTO reforms to curb Chinese violations; farmers now getting more income from US government than from ag sales
The weekly trade report with L.C.
Two important sources of US conflict with the EU bear watching. The first is the conflict between the two trading partners over WTO rulings against both. As expected, a WTO arbitrator on October 13th authorized the EU to retaliate against US subsidies to Boeing with countermeasures worth $3.993 billion a year. If Brussels goes ahead with the retaliation, it will take the form of tariff hikes, which could be as high as 100%, on an array of US exports, largely chosen for their political sensitivity or importance to Boeing.
It is now “crunch time” after more than fifteen years of the WTO’s longest and highest valued dispute. The US has already hiked tariffs on EU exports worth about $7.5 billion and the EU can now respond, it suggests, against a similar amount of US exports if it also uses about $4 billion in tariffs authorized years ago by the WTO in a separate dispute but never imposed.
Both sides are continuing to promote the idea of negotiating a new civil aircraft subsidies agreement, which would lead to an immediate suspension of the tariffs. Both Airbus and Boeing said this week that they support such an effort. And in Washington, Senate Finance Committee Chairman Chuck Grassley (R-IA) called for a negotiated solution, telling reporters, “I’m surprised that we aren’t sitting down and negotiating” already.
An agreement is important for both the US and European aircraft industries because other countries – China, Russia, Japan, Brazil – are considering entry to the market for large civilian aircraft. A US-EU agreement on restraining aircraft subsidies could force other countries to comply. Admittedly, the pandemic has made the competitive threat less imminent given the weakening of demand for new aircraft.
DST deadline extended, tariffs could result
The second potential major conflict is over digital service taxes (DST). New technologies, the rise of multinational companies, multinational sourcing of industrial inputs, and tax avoidance strategies have made previous national tax schemes inconsistent with each other and harmful to growth. France and other countries are threatening taxes specifically aimed at the profits of major US tech companies. This brings the threat of an additional US-EU trade confrontation and a new tariff war.
On October 12th, the OECD granted a short respite from the expected showdown. It announced that it was extending from end-2020 to mid-2021 its deadline for concluding a global framework for digital services taxes. (Founders Broadsheet will devote a special issue to the subject next week.)
President’s speech to the Economic Club
Virtually addressing the Economic Club of New York on October 14th, President Trump spoke at considerable length about his trade policy. He singled out the EU and China as abusive trading partners. He also stated his intention to punish companies that off-shore production and reward those that re-shore production. These intentions not only appear WTO-illegal but would provide an incentive for companies never to locate manufacturing within the US.
The president also stated, “We will ensure that America remains the world’s number one energy producer.” This assertion contrasts starkly with reports that a Biden-Harris administration, if elected, will seek to enforce green energy mandates – i.e., anti-fossil-fuel policies — through US trade agreements.
Japan joins US-Brazil push for market-oriented WTO reform
One rare sign of positive engagement with the WTO by the US came as the US, Japan, and Brazil, with support from the UK, issued a joint statement on “Importance of Market-Oriented Conditions to the World Trading System.”
The statement is an effort primarily to isolate China. It uses to good effect the fact that the WTO is premised on countries aspiring to freer trade and markets. Otherwise what’s the point of having global trade rules if rules applied by individual countries can be discriminatory and market-distorting?
This could be a sound basis for proceeding with WTO reform, though otherwise the US has mostly not made clear how the principles in the statement might be instantiated in specific changes to WTO rules or functioning. Presumably, however, there could be new or revised agreements restricting domestic subsidies, government encouragement of overcapacity, and forced technology transfer.
Other countries might insist in return that there be more explicit rules for limiting the claims of national security exception. They could alsorefuse to proceed while the US is obstructing the dispute settlement system. But at least this is a roadmap of sorts for beginning to engage in discussion of reform. It would force countries to choose sides in a situation where the US is on the side of WTO principles. This reform push at the WTO takes place at a time when China is becoming increasingly isolated.
WTO members question US-Japan trade agreement’s consistency with rules
Meanwhile, however, the US-Japan trade agreement is being questioned as to whether it conforms to WTO rules regarding limited tariff agreements. Ordinarily, such agreements require benefits to be extended to all WTO members (the “most-favored nation” requirement). To avoid MFN obligations, a bilateral or regional trade agreement like that between the US and Japan must substantially eliminate all restrictions on trade (i.e., be a free-trade agreement) or the limited agreement must be temporary, with a full FTA in preparation. But Japan reportedly doesn’t want a full FTA with the US, so the questions about the agreement could turn into formal complaints.
New developing-sector trade measures
The administration has taken two steps to foster increased trade with developing countries. On October 15th, the US signed a Trade and Investment Framework Agreement with Fiji. TIFAs are agreements with countries the US wants closer trade and investment relationships with. They may be preliminary to a full FTA in the future. The US has FTAs with most developing countries in Asia. US Trade Representative (USTR) Lighthizer indicated that the Fiji TIFA has strategic importance and should boost US “economic commitment to the region and uphold a free and open Indo-Pacific.”
Similarly, the US International Development Finance Corporation on October 15th unveiled a “Roadmap for Impact: DFC’s Inaugural Development Strategy.” The roadmap formalizes the government’s “commitment to support investment in the regions of the world most in need.” The DFC intends “to commit over $25 billion and mobilize an additional $50 billion of private capital to expand access to energy, healthcare, financial services, food security, technology, and the WASH (water, sanitation, and hygiene) category, while reaching at least 30 million people.” The targets for assistance are low and lower-middle income countries, often “where it is difficult to attract private capital,” using DFC’s “finance tools – including debt and equity authority, political risk insurance and technical assistance.” The investments will be evaluated “not only in terms of the inputs” but outputs. “We will track how many people get first-time financing [and] access to… services that will improve their quality of life and create economic opportunity.” The Roadmap looks like a belated response to China’s Belt and Road initiative.
Questionable tariff on a superior Chinese product
More controversially, President Trump on October 10th announced that his administration would remove the exemption from Section 201 safeguards it had granted to bifacial solar cells from China. The tariff on the cells would be 18%. No national security justification for the tariff has been claimed.
Bifacial solar cells have solar capability on two sides, making them more powerful and more expensive than regular single-sided (monofacial) cells. The bifacial cells aren’t made in the US but, imported, they compete with American-made monofacial cells.
As with all of Trump’s protectionist measures, one sector of the economy receives benefits at the expense of another. In this case, the solar manufacturers want protection but the economically more important retailers, installers, and users of the product want to be able to obtain the bifacial cells at a competitive, non-tariffed price. US tariffing of a superior Chinese product to which unimpeded access is desired by American businesses does not make for good administration optics.
Farm dependency
The administration has also turned the farm sector into welfare dependents at considerable cost to the US taxpayer:
[T]here’s likely no bigger example of [Trump trade war] dysfunction than the billions of dollars in new federal subsidies that the Trump administration has provided — with essentially no congressional oversight — since 2018 to politically‐important American farmers who were harmed by (totally expected) foreign retaliation against U.S. agriculture exports…. According to Politico, direct farm aid in 2020 is scheduled to hit $32 billion — “an all‐time high, with potentially far more funding still to come… amounting to about two‐thirds of the cost of the entire Department of Housing and Urban Development and more than the Agriculture Department’s $24 billion discretionary budget” — and many experts fear that “Washington could have a difficult time shutting off the spigot” in the future.
https://www.cato.org/blog/calculating-true-cost-trumps-trade-wars
NSC report on advanced technologies
Protectionism with a provable national security justification is another story. That justification, however, was used dubiously in the case of the aluminum and steel tariffs the president levied early in his administration. On October 15th the White House National Security Council released an eighteen-page report providing guidance for how the government and private sector will protect advanced technologies crucial to national security and economic strength. The report makes clear that the targets of concern are China and Russia.
A key US defense is the export control regime. The report calls for a whole-of-government effort to protect US technologies from falling into rogue hands while encouraging further US innovation in critical areas. The government should, the report says, boost its R&D spending to spur technological development in the targeted areas. It also calls for incentivizing high-tech workers and investors in the private sector to sustain advanced R&D. But past administration budget requests have cut civilian R&D.
Twenty “critical” technologies
The report provides an initial list of 20 “critical” technologies, which is to be updated annually by the NSC. On the list: advanced computing, advanced conventional weapons technologies, advanced engineering materials, advanced manufacturing, advanced sensing, aero-engine technologies, agricultural technologies, artificial intelligence, autonomous systems, biotechnologies, chemical-biological-radiological and nuclear mitigation technologies, communication and networking technologies, data science and storage, distributed ledger technologies, energy technologies, human-machine interfaces, medical and public health technologies, quantum information science, semiconductors and microelectronics, and space technologies.
The administration will set up three tiers into which it will put each technology, with those in the highest tier receiving the highest level of government support while for the others, it will “contribute as a peer with allies and partners” to protect and encourage them.
There was immediate criticism of the new report. Some analysts faulted it for listing such broad areas – e.g., “semiconductors,” “data science,” “medical tech” – that it would be useless for drafting specific actions or understanding what any new rules apply to. Some also pointed out that the administration has been moving in the opposite direction, not just with its R&D funding proposals but on adding so many restrictions on immigrants and foreign workers and students that it is already crimping research, while new Committee on Foreign Investment in the US (CFIUS) regulations might hinder foreign investment in key areas. Private industry has also expressed concern about possible over-regulation stemming from the new rule-making that could limit innovation, competitiveness, and trade.
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