By Trade Correspondent L.C.
The G7 meeting in Biarritz, France ended inconclusively with French President Macron and US President Trump contending over rival agendas and the US president under particularly heavy pressure to de-escalate the US-China trade war. Over the same weekend, international central bankers met in Jackson Hole, Wyoming and struck a similar tone. They complained of the pressures on them to bail out the world economy — for problems, notably trade wars, not their doing and which they themselves couldn’t remedy.
President Trump, eager to avoid a stock market plunge when markets opened Monday morning, claimed that China had just indicated a desire to return to negotiations and that a US-Japan trade deal was imminent. The president’s claim was not supported by subsequent Chinese statements, however. While the narrow trade deal between the US and Japan was confirmed by President Trump and Prime Minister Abe’s in a joint announcement on August 25th on the sidelines of the G7 summit, the agreement had been been anticipated and reported a week earlier.
More trouble in US-China trade
During the previous week, markets had been seriously roiled by escalation of the US-China trade war, already jittery from an announcement earlier in the month that the US would impose a 10% tariff on remaining imports from China. China responded on August 24th by hiking tariffs on more US exports. This was quickly followed by the US retaliating by hiking all existing and announced tariffs on imports from China.
Meanwhile President Trump created a domestic uproar by means of a lengthy Twitter thread on August 23rd in which he wrote:
“We don’t need China and, frankly, would be far…better off without them…. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing.. your companies HOME and making your products in the USA.”
This incited a firestorm of responses, centered about the fact that the US government can’t give such orders to private companies and that an attempt to do so contravenes the country’s market system as well as the Constitution. Strong push-back followed from political figures, commentators, and major business organizations.
Many pointed out the folly of trying to force US companies out of China. Recent reports have made clear that other countries where companies might move manufacturing – Vietnam, Thailand, Mexico, Bangladesh – lack enough workers (including skilled workers) and infrastructure to be practical for accepting major new investments. The US itself not only lacks workers for new manufacturing jobs but has long been transitioning to a higher-value-added and service economy where such work isn’t wanted and doesn’t make sense.
Moreover, US companies can’t afford to forgo the Chinese market, the largest in the world by population and a major consumer of US products. Collapsing access to that market could kill major US companies, which are already feeling the double blow of Chinese tariffs hitting their products while China simultaneously reduces tariffs on foreign suppliers that are US rivals.
Regarding whether he has constitutional authority to give such an order, the president had a retort. He tweeted on August 23rd:
“For all of the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!”
The IEEPA allows a president to take extraordinary measures to sanction a country or block US business with it if he declares a national emergency. But it has never been used simply as a trade policy tool to force an unwinding of existing commercial ties.
Two days later the president told reporters, “I could declare a national emergency. I think when they steal… our intellectual property… and when we have a total loss of almost a trillion dollars a year — for many years this has been going on — and in many ways that’s an emergency.” He added, nonetheless, that he has “no plan” at the moment to invoke the IEEPA.
Beyond the uncertainty over the trade war, US-China relations were also shaken this week when Beijing threatened to impose sanctions on US companies involved in the projected $8 billion sale of F-16 jets to Taiwan. The sale has bipartisan support.
With the Hong Kong rights demonstrations continuing at a high pitch, the US continues to warn China against a heavy response. Vice President Mike Pence told an audience on August 19th, “For the US to make a deal with China, Beijing needs to honor its commitments, beginning with the [1984] commitment… to respect the integrity of Hong Kong’s laws through the Sino-British joint declaration.”
The week also brought developments regarding Huawei. The suspicion remains that the President would be comfortable using it as a trade bargaining chip despite the security implications. The national security bureaucracy is so concerned that it recently held a 2-day war-game exercise to test responses should Huawei emerge as the unchallenged 5G leader.
The Commerce Department announced on August 19th that it was renewing for another 90 days, through November 18th, the temporary general license enabling Huawei to buy US technology even as it remains on the US Entity List. The move was immediately denounced by Senate Minority Leader Chuck Schumer (D-NY), who tweeted it was a “huge mistake” to let China ‘off the hook.’ It’s clear that this decision, made at this particular time, is politically motivated and has nothing to do with national security.” The Commerce Department, however, claims that the renewal was made to give more time to transition away from Huawei relationships.
European developments, including possible US-EU trade war
There were other US-European developments last week besides the goings-on at Biarritz. On August 20th the US president, in remarks to reporters on relations with the EU, said, “Dealing with the EU is very difficult, they drive a hard bargain. We have all the cards in this country because all we have to do is tax their cars and they’d give us anything we wanted because they send millions of Mercedes over, they send millions of BMWs over.”
It appears that Brussels isn’t planning to ease, however. According to an internal EU draft document obtained by Politico, there are new proposals under discussion in Europe for dealing with the US-created crisis at the WTO and with competition from the US tech giants that are seen as threatening the development of European companies.
The 173-page draft document proposes that member governments give the European Commission new authority to impose tariffs unilaterally, even if against WTO rules.
The other US-targeted proposal in the document is for creation of a “European Future Fund” through which the EU would buy $100 billion in equity of European companies on the cutting edge of technology. It would aim to create companies that can compete with the global leaders Europe conspicuously now lacks. This would be aimed not just at countering the competitiveness of US companies but also of the Chinese tech and Internet giants. It would amount to direct commercial intervention and subsidization by Brussels to build up certain industries.
The US Trade Representative meanwhile is preparing a retaliation list of French products to be hit with sanctions in the dispute over France’s digital services tax that singles out major US tech firms.
Europe’s “woke,” more-Green-than-thou President Macron is meanwhile threatening to scuttle an EU-Mercosur trade deal on the pretext that Brazil’s conservative president is abetting land-clearing fires in the Amazon. In point of fact, it’s the dry season there. The fires are normal at this time, and the same fires are plaguing nearby socialist Bolivia, which Macron has abstained from criticizing.
Meanwhile the UK is making headway in its effort to forge bilateral free trade agreements with the EU’s FTA partners. These are intended to take effect when the UK exits the EU at end-October. The UK has now concluded 13 “continuity” agreements – that is, deals largely replicating those that the EU has with trading partners.
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