Trade Correspondent L.C.’s Weekly Trade Report:
As anticipated (URL), President Trump and Prime Minister Shinzo Abe announced a limited trade agreement dealing mainly with tariffs and a second agreement on digital trade when they met in New York on September 25th. But the expectation that President Trump and Prime Minister Narendra Modi would announce a limited trade deal when they met the day before, also in New York, proved wrong.
US Trade Representative (USTR) Robert Lighthizer said he expects entry-into-force of the US-Japanese agreement by January 1st, 2020. The Abe government is expected to meanwhile submit it to the Diet (Japan’s Parliament). The US Congress won’t need to be involved since the President is permitted to implement a limited tariff-focused deal on his own.
USTR Lighthizer told reporters that talks for a broader agreement with Japan would likely begin in late April-early May.
The US private sector didn’t have their full wishes met by this week’s accords and are pushing for something broader. Japan, however, may not be so eager. Prime Minister Abe is already being criticized for giving away agricultural market access without getting much from Washington. A Japan Times opinion piece groused that “the agreement is nothing short of a scheme to help Trump win farmers’ votes in the U.S. Midwest and get re-elected next year.”
Grabbing the most attention was the lack of a written promise that President Trump won’t impose Section 232 tariffs on Japanese automotive exports, on which a decision is due by mid-November. The current deal does cut US tariffs on some other industrial products, though it leaves in place the Section 232 steel and aluminum tariffs.
US agriculture groups representing many products – though not dairy – responded favorably, lauding the agreement as finally enabling them to compete in the Japanese market with the Australians, New Zealanders, Canadians, and Europeans who already have free trade agreements (FTAs) with Japan. The US did not, however, get better access for rice or butter, making this deal not as good as US membership in the Trans-Pacific Partnership (TPP) would have been.
The anticipated limited trade deal with India falls through
The failure to conclude a limited US-India trade deal was a setback for US trade policy. The White House had been seeking to conclude several small-bore trade agreements with friendly countries to have at least some trade successes to point to. The fate of the USMCA in Congress and the outcome of the US-China trade talks remain unclear, and much of the rest of the world has moved to or is about to move to FTAs without the US. This has been unsettling the stock market, US manufacturers and farmers, and Republican politicians who will face voters next year.
Reaching a deal is also important for Modi, under whose leadership the growth of the Indian economy has been slowing recently. Both Indian and US officials insist that negotiations are continuing and that they expect to have something to announce fairly soon.
Accounts, especially in the Indian press, say that the US made demands the Modi government simply couldn’t meet while offering little, not even the full reinstatement of India’s Generalized System of Preferences (GSP) benefits. India’s main focus was on winning back the full GSP benefits, ending the Section 232 tariffs on its steel and aluminum, and protecting its domestic market from liberalization that would threaten jobs.
De-listing China from US exchanges?
The Trump administration is reportedly considering ways to limit US financial flows to China. Several options are under discussion, including de-listing, limiting Americans’ exposure to the Chinese market through government pension funds, and keeping Chinese companies out of stock indexes managed by US firms.
De-listing would have major consequences. There are 156 Chinese companies listed on US exchanges, at least 11 of them Chinese state-operated enterprises (SOEs), for a total market capitalization of about $1.2 trillion. Efforts to force these companies out of the US capital markets could have a disruptive impact on the global financial system. They would also force a sharp depreciation of the yuan, just the opposite of what President Trump has called for. Acting to block US financial flows to China would go a long way toward the decoupling of the two economies.
A complication is the fact that China, long faced with foreign calls to further open its economy, has just removed some of its barriers to foreign investors operating in China, liberalizing its capital markets, lifting caps on foreign stakes in Chinese firms, and ending other barriers to the inflow of funds. Moreover, Chinese investment in US equities markets is much larger than US investments in China’s, so Beijing could inflict much harm on the US if it retaliated in kind. The lead editorial in the September 30th Wall Street Journal, “The Worst China Trade Idea,” warns that
A blanket ban on bilateral investment is a good way to hurt America while making Chinese reform less likely. The de-listing of Chinese companies is especially foolish. American financial exchanges are sources of U.S. economic strength, but they compete in a global market. Foreign firms can choose to list in London or Hong Kong or Frankfurt as easily as on the Nasdaq or the New York Stock Exchange. Banning Chinese companies from U.S. exchanges would merely hurt those American businesses and U.S. capital markets. The damage to the Chinese firms would be minor because investors would still be able to raise capital elsewhere.
US-EU redoubled tariff war?
EU Trade Commissioner Cecilia Malmstrom and Lighthizer met on September 25th while both were in New York for the UN General Assembly. Malmstrom reported that they discussed tariffs, the WTO aircraft subsidies dispute, regulatory cooperation, and WTO reform. There was no indication that they got closer to resolving what is currently the top issue in US-EU trade: the looming tariffs both sides are likely to impose since both won their respective WTO cases against the other’s aircraft subsidies.
There were two developments this week suggesting that both sides are willing to ramp up the dispute. Sources report that the White House is looking into using the “carousel approach” – meaning that the US would periodically change the mix of EU products hit with the tariffs. It is highly annoying to the targeted trading partner because it causes great uncertainty for its exporters. The EU has always decried the approach and is the only trading partner the US has used the tactic against (in the dispute it won against Brussel’s ban on hormone-treated beef).
From the EU side, Brussels is reported to be contemplating hitting the US with tariffs without waiting a few months for the WTO to give the go-ahead. The coming tariffs – if they do come – could quickly intersect more and even more explosive new US tariffs on EU exports if the President decides in mid-November to impose Section 232 automotive tariffs on Europe. The EU will respond aggressively to all these moves by Washington.
US success in Universal Postal Union negotiations
The Trump Administration was successful in getting the UN’s Universal Postal Union (UPU) to approve a compromise plan for allowing countries to raise terminal dues. The vote took place at the UPU’s “extraordinary congress” that was convened to deal with the US’s threat to withdraw from the organization. Terminal dues are the fees that a postal service of a destination country receives from the postal service of the country where an international package originates.
The terminal rates issue has become increasingly important as Internet sales of small, individual packages from foreign suppliers have soared. The US Postal Service loses money on many of these packages which it in effect subsidizes. Private shipping companies – UPS and FedEx – also lose because they can’t compete with the US Postal Service’s subsidized rates. For this reason, reform of the system had broad support within the US.
China has been the main beneficiary of the extra-low subsidized rates charged for small parcels (under 4.4 pounds, or 2 kg) mailed to the US from developing countries – because in the UPU, as in other international bodies, it is treated as a developing country, whose small shipments to rich countries are subsidized.
Assistant to the President Peter Navarro hailed the vote as a “historic victory” and told reporters, “We will begin our self-declared rates at the end of June next year. This is exactly what we wanted…. We’ll buy less Chinese stuff, buy more from other countries, we will make more in America and the market will be free of distortions…. China is certainly going to pay more for the privilege of shipping to our market,” he said.
Impeachment effort could hurt USMCA passage
While the effort by House Democrats and USTR Lighthizer to reach an accord on the USMCA appeared to move forward this week, a new question arose for its fate. As the only pending Trump trade agreement that will need congressional approval, Democrats’ launch of an impeachment inquiry could scuttle its chances of passage in the House. That is, will the tumult, attention-diversion, and ratchet-up in partisan animosity that impeachment will surely stir up make impossible the bipartisan cooperation needed for passage of a USMCA implementation bill? Stay tuned.
EU backing out of Mercosur FTA on spurious Amazon fire complaint
The EU-Mercosur FTA ran into a roadblock with last week’s near-unanimous vote to reject it by the Austrian parliament’s EU subcommittee. Since ratification must be unanimous by all EU member-states, this kills the deal, unless somehow reversed. The debate in parliament focused on the Brazilian government’s allegedly poor reaction to the Amazon forest fires and on President Jair Bolsonaro’s alleged pullback from his commitment to the Paris climate accord. But the debate also made clear that perhaps the key reason for rejection was fear about opening the EU market to Latin American agricultural powerhouses Brazil, Argentina, and Uruguay.
Leave a Reply