This week’s report with trade correspondent L.C. covers US trade developments with Canada (lumber), Vietnam (tires), Brazil (steel), and Taiwan (FTA); the Republican convention; and Japan-Australia-India talks for “supply chain resilience”
A WTO dispute settlement panel has found that the US erred in determining that Canadian softwood lumber was unfairly subsidized and that it therefore erred in applying a 14.25% countervailing duty to Canadian lumber imports in 2017, along with a 6.58% antidumping duty. This is an important ruling because it gives more ammunition to US Trade Representative (USTR) Robert Lighthizer’s assertion that the WTO works against US interests and unfairly decides issues to the US’s disadvantage.
If the US appeals, it would be another point of trade friction with Canada, whose anger was also recently stoked by the re-imposition of Section 232 tariffs on its aluminum exports.
Canadian Trade Minister Mary Ng pointed to the unanimous panel ruling and said the US should immediately remove the duties:
“Canada remains unequivocal: US duties on Canadian softwood lumber are completely unwarranted and unfair. Canada expects the US to comply with its WTO obligations…. [The duties] have caused unjustified harm to Canadian industry and US consumers alike. US home builders rely on Canadian lumber.”
This is a huge case. The US imports Canadian softwood lumber valued at almost $6 billion a year, making it one of the largest cases the WTO has dealt with. That large amount also is used by Ottawa to argue that the US needs these imports. US domestic production can’t meet the needs of US lumber consumers. As Ng stated, “the current record-high lumber prices” exacerbated by the duties “are hurting the economic recovery in both countries.”
Treasury tells Commerce that Vietnam undervalues its currency
The Treasury Department has determined that Vietnam has acted to keep its currency undervalued. That makes it more likely that the Commerce Department will determine that Vietnam unfairly subsidizes its tire exports.
Treasury informed Commerce that the dong’s real effective exchange rate is undervalued by 3.5% to 4.8%, due to the State Bank of Vietnam’s intervention in the forex market in 2019 when it purchased $22 billion. This allegedly resulted in a fall in the value of the dong relative to the dollar below what the equilibrium real exchange rate would be.
Hanoi’s trade minister submitted a letter saying the central bank conducts normal currency policies that are “not designed for the purpose of creating a competitive advantage for exports.” The pandemic makes it hard to determine if a currency is undervalued — and if so by how much – because all central banks have become more active. Vietnam’s central bank governor observed that it would intervene when necessary to stabilize the forex market and aid macroeconomic stability.
Currency undervaluation duties could backfire
Economist Mark Sobel of OMFIF (“the Official Monetary & Financial Institutions Forum”) published an analysis finding that “the US Treasury may have set off tremors for the international monetary system, concluding for the first time that currency undervaluation potentially warrants a Commerce Department subsidy finding…. [C]urrency undervaluation CVDs [countervailing duties] could ultimately harm multilateralism and the international monetary system. Treasury may rue the day.”
The Treasury assessment means that other domestic companies may be encouraged to file their own new petitions charging unfair-subsidy-by-undervaluation against other countries.
There are many problems with the new rule – among them, it appears to breach the WTO Agreement on Subsidies & Countervailing Measures — by targeting measures that apply to the whole economy and thus are not “specific subsidies.” It also could be thrown back at the US if other countries decide to impose CVDs on US exports because the US Federal Reserve is found to conduct monetary policy in a way that weakens the dollar.
Trump reduces permitted Brazilian steel imports in sudden move
President Trump unexpectedly issued a presidential proclamation late on August 28th shrinking the quotas for imports of certain Brazilian steel products through the end of the year. Brasilia had thought it settled the steel trade issue and brought certainty to its trade with the US when it accepted in 2018 quotas on finished and semi-finished steel in place of the Section 232 steel tariffs that originally applied to Brazil. A year ago, Trump threatened to revert to 25% tariffs but then backed off. This time, the proclamation implements the change, and it took effect immediately.
The president said the temporary quota lowering is needed because while US demand for steel is falling and “Imports from most countries have declined this year in a manner commensurate with this contraction… imports from Brazil have decreased only slightly.”
One negative impact of this move is its reinforcement of the perception that the US can’t be trusted on trade deals.
Taiwan’s President Tsai tries to bring US-Taiwan trade agreement within reach
But meanwhile, President Tsai Ing-wen is moving to pursue her ambition to negotiate a Taiwan-US free trade agreement. She announced in a speech on August 28th that Taiwan will ease the restrictions on imports of US beef and pork, hitherto the biggest obstacles to a bilateral trade agreement. Indeed, US Trade Representative Robert Lighthizer had identified them as such.
Tsai said Taiwan will allow imports of pork with some level of ractopamine, which is an additive given by US pork producers to produce leanness. It will also allow imports of beef from cattle over 30 months old. The ban on US beef from older animals goes back to 2003 and the emergence of BSE (mad-cow disease) in some American cattle.
Joe Biden’s chief foreign policy adviser, Anthony Blinken, released a statement saying, “Taiwan’s move to lift trade barriers is good for American farmers, ranchers, and our economy. Stronger economic ties with Taiwan also support our shared democratic values and our common commitment to regional peace and stability.”
Renominated Trump doubles down on trade policy
There were no indications at the Republican convention last week that the president might moderate his trade policy to expand his voter base and remove its negative economic and strategic effects. Economists estimate that his protectionist policies since 2018 have knocked one percent off US GDP growth.
Speaking to Fox News on August 23rd, the president said that if he is reelected, he’ll end reliance on China. “We don’t have to” do business with them. “We get nothing from China… [W]e get some goods that we could produce ourselves” and “that’s why I put tariffs on them.”
The comments indicate Trump’s continued ignorance of the benefits of comparative advantage and a global division of labor. The only US exceptions from this general principle should be products the US will require in an emergency and those embodying intellectual property that China will steal.
The president also kept up his assault on NAFTA, saying in his August 27th speech accepting the nomination, “Biden voted for the NAFTA disaster, the single worst trade deal ever enacted.” But experts point out that about 95% of the USMCA is taken from NAFTA.
Biden was attacked for his support of US trade agreements while in the Senate, though his record is mixed and he voted against some. His convention critics included Vice President Mike Pence, who voted for every US free trade agreement that came up while he was a congressman. Pence also expressed strong support for NAFTA and even the TPP.
Astonishingly, the Republican Party was unable to produce a party platform. This defaults the party to running on Trump as its program. Such politics of personalismo is more to be expected in a banana republic like Venezuela. If Trump is defeated in November, the party will have become instantly obsolete.
Japan-India-Australia supply chain pact
According to reports in the Indian and US press, Japan, India, and Australia are discussing teaming up to form a trilateral arrangement for “supply chain resilience.” As described by the Economic Times of India, the three countries “have begun discussions on launching a trilateral Supply Chain Resilience Initiative (SCRI) to reduce dependency on China, necessitated by Beijing’s aggressive political and military behavior.”
First proposed to India by Japan’s Ministry of Economy, Trade and Industry, it meshes well with Prime Minister Narendra Modi’s effort to attract investment that is leaving China and with his Make in India initiative; as well as with Japan’s recent decision to provide financial incentives for Japanese companies leaving China. Meanwhile, Australia’s trade and other) relations with China are deteriorating as China slaps restrictions on Australian imports. Hence, it too has an incentive to strengthen other trade relationships in the region, even though it already has a web of free trade agreements.
Departing Prime Minister Shinzo Abe has been a key promoter of strategic cooperation with India and Australia, having developed the initiative for the “Free and Open Indo-Pacific” involving the three countries plus the US. Abe will be sorely missed for his contributions to building urgently needed Pacific trade and security alliances to resist China, a role that President Trump should have but didn’t play.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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