Despite export boom, US tax cuts and deficit will increase imports over exports, threatening ill-considered administrative protectionism

Trade correspondent LC’s weekly report

The probability that the trade deficit will continue to grow presents a danger for US trading partners. The recent US tax cuts and government spending hike will likely increase US demand, keeping US savings lagging consumption and attracting even more imports, pushing the trade deficit up. Strong demand abroad should help US exports also continue to boom, but not enough to narrow the gap. While most economists see booming US trade as a positive, regardless of the deficit, President Trump doesn’t presently share that view and neither does his US Trade Representative (USTR), Robert Lighthizer.

The foreign response to the Trump-imposed safeguards on solar and washing machine imports continued this week. Safeguard measures are import restrictions imposed when some domestic industry faces irreparable damage from an unexpected surge in imports.

But did the US follow the letter of the law – and existing trade agreements – in imposing safeguards on the two imports?

Apparently not. There are now four trading partners that have filed for World Trade Organization (WTO) consultations with Washington: South Korea, Taiwan, China, the EU, and there is concern that China might escalate its retaliation by restricting US soybean imports. And three Canadian companies and a US importer of Canadian solar technology have sued the US government at the Court of International Trade in New York, charging that the safeguards violate both US law and NAFTA.

 

The imposition of safeguards against a country not found to be causing injury also breaks rules set out in the WTO Agreement on Safeguards for how countries are permitted to impose safeguards. The Koreans already raised this issue by noting that the US International Trade Commission (ITC) injury investigation on washing machines found that exports from Korea are not a cause of injury. Yet South Korea was included in the restrictions.

The Canadian companies’ lawsuit claims that the safeguards will inflict immediate, severe, and irreversible harm to them and asked the court for an expedited decision.

The President doesn’t seem to be backing off. At a February 5^th rally in Ohio he declared that “countries that have treated us so unfairly” should expect US action soon. “Wait until you see what’s happening over the next two or three months, with what we’re doing to countries that have treated us so unfairly… In many cases, so-called friendly countries.”

The President indicated to legislators this week that he still looks fondly on the possibility of withdrawing from NAFTA.

The trade deficit rise – and especially the jump in the bilateral goods gap with China – is fuel for the drive toward unilateral action. Democrats are gassing the engine by blaming the President for the deficit rise and excoriating him for his failure so far to take stronger action against trading partners.

The mounting protectionist pressure was met this week from the other side by a February 8^th letter to President Trump from the head of the American Institute for International Steel (AIIS), which represents the steel importing industries. The letter urged him not to impose import restrictions under Section 232 of US trade law (concerning goods vital to security), arguing that imported steel actually has a “positive” impact on US national security.

Support for the AIIS’s view against Section 232 barriers to metal imports are shared by many, who on the other hand strongly support taking action against China under Section 301 (violation of trade agreements or engagement in other unfair trade practices).

The head of the US Chamber of Commerce, Tom Donohue, told the Asian press this week that his group thinks “The White House is right to focus on China’s industrial policies and their challenge to the global economy.” “[That] includes Chinese market access restrictions, subsidies, data and cyber policies, forced tech transfer, IP theft” – all issues noted by the USTR when it launched the Section 301 probe. Further, “The status quo is not sustainable, but we need a smart approach. We need to work with allies in Europe, Japan and elsewhere to forge a common response to China’s state capitalism.”

That the President has still not decided what Section 301 action to take suggests that his advisers remain divided. Some clearly side with the Chamber and US allies and prefer to pursue 301 action through the WTO, at least when aimed at Chinese practices that violate WTO rules.

Click here to go to the previous issue of Founders Broadsheet (“Cash-starved military gets funds but budget deal shows high cost of bipartisanship”)