The weekly trade report with L.C.
At the last minute, the US and China called off the six-month review of their Phase One Trade Agreement. The cancellation does not, however, appear to be a negative signal for the trade deal, still considered one of the few (perhaps only) bright spots in the darkening bilateral relationship. Sources quickly told reporters that the delay was due to scheduling conflicts. The Chinese leadership is currently involved with the Beidaihe gathering of the elite, a regular August event, and also because China is currently stepping up its purchases and contracts to purchase US commodities. China is recovering fairly quickly from the pandemic shutdown and is therefore now in shape to increase its imports more than it was earlier. Allowing more time for purchases to materialize means that the review will take place after China comes closer to meeting its purchase commitments. That will make both sides look good and allow for a smooth review.
The President has two key political reasons for keeping Phase One intact as the election approaches. He needs Chinese commodity purchases to keep support of US farmers, and he needs to counter the criticism from Joe Biden that the Phase One deal and the tariff war with China have been a damaging failure. Moreover, should the deal fall apart, he is committed to hiking still further the Section 301 tariffs on China, and that would be economically damaging and bring no political benefit. President Xi Jinping also probably doesn’t want another indication that his policy toward the US has been counterproductive and so also won’t pull the plug on the deal unless there is a drastic change in circumstances.
Decoupling a contingency for both US and China
Although neither leader appears ready for the sharp decoupling that would be the endpoint of the current trajectory of the relationship, both are preparing to go down that path.
The Trump Administration continues to openly push US companies to exit China, preferably to re-shore factories to the US but to other locations as well. Washington, like Tokyo, is looking at ways to offer financial and tax incentives for companies leaving China and has begun programs to incentivize domestic production of important products like semiconductors and medical equipment. In part the impetus comes from the president’s personal mercantilist orientation, but the political establishment has fully bought into the idea that certain goods should be made at home and also that the less we rely on China, the better.
There isn’t that same degree of buy-in yet from the business community. The US-China Business Council released on August 12th its periodic survey on the sentiment of its member companies operating in China. It found that 87% reported they have no plans to relocate out of China. Of those with such plans, 11% intend to move production elsewhere (especially Mexico or Thailand) and only 4% to the US. Other recent surveys have similarly shown that most foreign companies in China aren’t making plans to relocate.
Why can’t Lighthizer resolve Taiwan free trade issues?
The question of closer US trade ties with Taiwan has gotten mounting attention recently. The prospect of a bilateral FTA remains explosive, as China has intensified its criticism of US relations with Taiwan, expressing special anger at the recent visit to Taipei by Health & Human Services Secretary Alex Azar. He was the highest-ranking US official to visit the island nation since 1979. Azar told reporters he discussed the bilateral trade relationship with Tsai.
President Tsai, in trade-related remarks on August 12 during a virtual meeting with the Hudson Institute, said:
TSMC [Taiwan Semiconductor Manufacturing Co.] has announced that it will be building a state-of-the-art facility in Arizona. Over the past year, American companies such as Google and Microsoft have substantially increased their investments in Taiwan. We must be clear-eyed on how we can move forward on FTA. For too long, closer trade relations have been hindered by technicalities that account for just a small fraction of two-way trade. We want to work together to resolve these issues in a way that is safe for our consumers and also consistent with established scientific standards. I believe that the people of Taiwan can see the value and wisdom in building closer economic relations with the US and conversely, we hope that the US recognizes the broader strategic implications such an agreement will undoubtedly have.
Lighthizer not expediting FTA as he should
The Wall Street Journal reports that the White House National Security Council and the State Department “have been pressing for free-trade talks with Taiwan as a way to add pressure on Beijing,” but administration officials “say Lighthizer has so far stymied the idea, due to his objections to what he considers Taiwan’s protectionist policies.” Those largely focus on beef and pork regulations. The Taiwanese, however, insist that health issues are at stake, not protectionism.
Taiwan continues to be a major purchaser of US military technology. Taiwan’s main representative to the US, Hsiao Bi-khim, also spoke at the Hudson Institute event, warning that the country is facing “an existential survival issue” from China’s territorial claims. Therefore, she said, it must expand its “asymmetric capabilities… lethal enough to become deterrence – to make… an invasion very painful.” Taipei is talking with Washington about acquiring new military equipment including missiles and underwater mines. Tsai also told the event that expanding asymmetric defense capabilities is a number one priority.
It should also develop natively the deterrents that keep Israel safe. We believe it has the resources to do so.
Aluminum and lumber tariffs harm users
After President Trump reimposed the Section 232 10% tariff on Canadian aluminum and Ottawa retaliated, the US move has come under intensifying criticism. Moreover, the tariffs don’t address the main issue in global aluminum trade – Chinese subsidies. While the US still points to alleged transshipment of Chinese aluminum through Canada, Ottawa has put in place programs to prevent such transshipment, including provisions in the USMCA. So the Canadians are rightly angry.
US manufacturers of aluminum-containing products are threatened with damage no less than their Canadian counterparts. The original imposition of the Section 232 tariffs on aluminum in 2018 led to the administration expanding the Section 232 tariffs to downstream goods made with aluminum because the tariff on raw aluminum had made these downstream products uncompetitive. There is no reason to think the reimposition of tariffs on Canadian aluminum won’t once again hurt the secondary aluminum users.
On August 10th the Coalition of American Metal Manufacturers & Users (CAMMU) released a statement saying,
The last 24 hours is more evidence of why the reliance on tariffs as a trade policy was largely abandoned in the 1930s. Hours after [the US tariff reimposition], the Canadian government announced that it will place $2.7 billion in tariffs on US aluminum exports. The North American supply chain is integrated and aluminum-using manufacturers on both sides of the border will be hurt…. The Trump Administration is taxing the very inputs manufacturers need to produce the medical supplies here in the US that are saving American lives…. US manufacturers have paid billions of dollars in tariffs over the past two years…. CAMMU continues to call on the President to terminate the Section 232 tariffs on steel and aluminum imports.
Canada charges Trump aluminum tariffs help Russia
Canada stepped up its criticism, now arguing that Trump’s tariffs will help Russia, not US companies. On August 12th, Canadian Amb. Kirsten Hillman said in an interview that only two US companies, Century Aluminum and Magnitude 7 Metals, called for the tariffs while “the rest of the industry, which represents 97% of American jobs in the aluminum sector,” opposes them. The biggest beneficiaries, Hillman said, will be “a Swiss trading company [Glencore PLC] and Rusal aluminum of Russia.” Glencore, she charged, has a major interest in Century and Magnitude and has exclusive rights to sell Rusal aluminum in the US.
The reason why the President might have been swayed by appeals for protection from the two US companies is that their facilities are located in the electorally important states of Kentucky and Missouri. But Hillman made clear that Ottawa will direct its counter-tariffs to hurt other electorally important states including Michigan and Wisconsin. “We’re trying to have the strongest possible impact in the US, while at the same time minimizing the downside for Canadian importers and consumers,” she said.
US home builders want duties on Canadian lumber lowered
Separately, calls are also intensifying to lower the US duties on Canadian softwood lumber. Those duties have been imposed for years as a result of US antidumping and countervailing duty cases brought by the US lumber industry. Ottawa challenged the duties at the WTO and in NAFTA, and those actions haven’t yet been brought to a conclusion. Meanwhile, the National Association of Home Builders has written to President Trump pointing out the recent spike in lumber prices and asking him both to encourage domestic producers to step up production and take steps to lower the duties on Canadian softwood lumber. Like aluminum, the US does not produce nearly enough softwood lumber to satisfy demand and so the additional duties place a severe burden on domestic users of the material – not to mention the higher sticker price paid by the final consumer.
Europe: Airbus and Nord Stream 2
Several US-EU-UK controversies have still to be resolved. In the case of the controversy over Airbus and Boeing subsidies, the parties are talking and at least not raising the stakes.
A separate point of US-EU tension heated up this week – US sanctions on European companies involved in the Russian-controlled Baltic Sea Nord Stream 2 gas pipeline. The EU has long objected to US extraterritorial sanctions laws that hit companies from other countries. But the issue splits the EU, with a number of Eastern European countries sharing the US’s opposition to the Russian-backed pipeline. While Nord Stream 2 gas would compete with US sales of its abundant natural gas, Washington has long been worried about the strategic implications of Russian control of Europe’s access to gas rather than the commercial implications. Because the sanctions would hit major European companies, the issue has become important to the trade relationship.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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