Little support in private sector for administration’s escalating trade war

Trade correspondent L.C. reports: The US has imposed the threatened third major expansion of Section 301 tariffs —  10% tariffs on $200 billion in Chinese exports to the US. China’s has responded with retaliatory tariffs that will hit $60 billion in US exports to China and take effect today, Sept. 24th. There is virtually no support within the US private sector for this escalating trade war. Almost all the public comments submitted while this new step was under review were opposed, and support is also lacking on Capitol Hill. But it does not look likely that will lead yet to the passing of bills to curb the President’s unilateral tariff actions — at least not before the November 6th midterm elections.

Nonetheless, as the microeconomic harms to businesses around the country intensify and the business and agriculture community speak out, the President’s trade policy is becoming a growing issue on the campaign trail, with Democratic candidates finding they can use his unpopular actions to good effect against their opponents.

Secretary of State Mike Pompeo is backing the President’s tariff measures. In a September 23th TV interview, Pompeo insisted that the President does not plan to retreat, and “to the extent one wants to call this a trade war, we are determined to win it…. We’re going to get an outcome which forces China to behave… — transparency, rule of law, you don’t steal intellectual property — the fundamental principles of trade around the world … those are things the American people are demanding and the American workers deserve.”

The delay in the originally threatened hike to 25% is not just to give China a chance to respond but, as an Administration official told reporters, to also give US companies time to adjust their supply lines, giving them three months to find alternate suppliers.

The Administration did respond in advance to certain high-tech and other companies, led by Apple, and removed from the list 297 intermediate goods used in technology products as well as some consumer goods. Not removed were some products that telecommunications companies say are needed for development of 5G mobile networks, and the industry says 5G will therefore be seriously impeded.

While it does appear that the President would welcome significant changes in China’s behavior and would see that as a victory, it also appears that he is comfortable imposing tariffs, even for the long-term, believing they will increase domestic manufacturing here (which has been growing at a healthy pace anyway for decades) and hurt China’s future prosperity. Some experts are seeing the opposite impact – US businesses cutting back plans for capital investment and laying off workers as their input prices rise and exports fall. China, on the other hand, has a new incentive to speed up its rush up the value chain to invest in new technology and wean its manufacturers away from depending on high-tech imported inputs. There are also reports that the tariffs are causing problems for private Chinese companies but less so for state-owned enterprises that can depend on government support. This is weakening China’s private sector vis-a-vis the state sector – the opposite dynamic from what the US wants to see.

Other analysts note other ironies and miscalculations from the US actions. As the Progressive Policy Institute’s Ed Gerwin wrote, “Worse yet, Trump’s ‘America First’ policies mirror abusive trade practices that China itself follows, including disregard for the rule of law, opaque administrative practices and subsidies for politically important groups, like farmers. By emulating China, Trump complicates trade enforcement, while enabling China to portray itself as a global trade champion. That’s a major win — for China.”

The September 17th tariff announcement was followed by a deluge of negative statements from the full array of business associations. The American Chamber of Commerce in China warned, “The downward spiral that we have previously warned about now seems certain to materialize.” Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways & Means Committee Chairman Kevin Brady (R-TX) also released statements expressing concern about a new imposition of tariffs. EU Trade Commissioner Cecilia Malmstrom, too, released a statement saying “We disagree with the methods” the US is using to try to change China’s behavior.

But while most aren’t predicting major macroeconomic effects in the near term, the majority opinion is that consumers will notice the tariffs and the resulting job losses.

Meanwhile, almost all the $140 billion or so in US goods exports to China are subject to Chinese retaliatory tariffs. US allies and Russia are now moving in to undersell the tariff-burdened US products. China is encouraging this development by lowering tariffs on its imports originating elsewhere than the US. Today’s Wall Street Journal features articles suggesting that US trade and Iran policies are also having the unintended effect of helping make Russia great again.

Meanwhile Alibaba head Jack Ma reversed his commitment to President Trump to create one million jobs in the US, saying, “This promise was on the basis of friendly China-US cooperation and reasonable bilateral trade relations, but the current situation has already destroyed that basis” and so “This promise can’t be completed.”

US-Canada negotiations over NAFTA at an impasse

The effort to conclude a three-country NAFTA 2.0 in time for the signing to take place by December 1st appears to have failed. The path ahead is unclear. The Trump Administration says it will release the text of the bilateral US-Mexico Trade Agreement. But many in Congress, especially among Democrats led by Finance Committee ranking Democrat Ron Wyden (D-OR), supported by organized labor, say that the President’s Trade Promotion Authority only covers revision of the trilateral NAFTA. Many Republicans also insist they want a three-way deal – though they aren’t united on this. House Majority Whip Steve Scalise (R-LA) released a statement on September 18th expressing “growing frustration” with Canada and indicating he could move ahead with a Mexico-only deal.

Separately this week, the US Chamber of Commerce, National Association of Manufacturers (NAM), Business Roundtable and three other business associations sent a letter to Lighthizer laying out six items that the private sector wants to see in NAFTA 2.0:

• Canada must be included,
• There must be binding dispute settlement mechanisms,
• There must not be an automatic sunset clause,
• There must be expanded access to government procurement markets,
• The threat of higher tariffs on vehicles must be terminated, and
• There must be strong rules on the newer issues of intellectual property protection, digital trade, and financial services.

The groups, which have particular clout with Republicans, made clear that they would not support a deal that excludes Canada: “It would be unacceptable to sideline Canada, our largest export market in the world.”

Japan-US trade relations also unsettled

Prime Minister Shinzo Abe will meet with President Trump on September 26th, when both will be in New York for the UN General Assembly. The meeting is already grabbing attention because Japan is seen as in a vulnerable spot, with the President wielding pressure that the Prime Minister can’t ignore. President Trump holds out the real threat of imposing 25% tariffs on Japanese car exports, a threat the Prime Minister has to take seriously given the immense impact such a move would have on the Japanese economy.

But the Prime Minister has some cards of his own: Japan is already stepping up imports from the US, mainly of items such as defense hardware and LNG that it needs. This can be portrayed as a win by the President. Japan will soon be part of the Transpacific Partnership (TPP-11), and probably, at some point in the coming year, part of the RCEP, while the Japan-EU free trade agreement (FTA) will soon take effect. While Japan’s trade outreach worries US businesses and farmers, it is not clear that it has affected the President’s thinking., and he is expected to put maximum pressure on Japan to agree to enter talks for a bilateral FTA or, failing that, to otherwise provide greater market access to US exporters, especially for agriculture, beyond the recent pledges to step up purchases of specific US products.

EU leads effort to reform WTO

The European Commission released on September 18th an informal 17-page “concept paper” presenting ideas for reforming the World Trade Organization (WTO).  The paper focuses on three areas:

• Rules (to add new ones to deal with issues that emerged since the WTO was formed in 1995),
• Notifications/monitoring (to increase requirements for transparency of trade practices, especially subsidies, requiring WTO notification), and
• The Appellate Body (to improve its functioning and meet US objections so it will lift its block on AB judge appointments).

Included among the many specific proposals are US-favored proposals for

• More clearly defining what countries can be considered “developing” and thus can benefit from the WTO’s Special & Differential Treatment,
• Setting rules to curb forced technology transfer and industrial subsidies especially linked to state-owned enterprises,
• Setting rules for e-commerce,
• Encouraging compliance with subsidies notification requirements,
• Dealing with US criticisms of the Appellate Body (AB), and
• Reducing barriers to services trade and investment.

The European Commission had been asked by EU leaders to produce these recommendations, and they follow quickly on the release last week of Canadian WTO reform proposals that essentially pointed to the same three areas as needing revision and updating. On the upcoming schedule for the reform effort is a meeting of the US-Japan-EU trilateral initiative for WTO reform and countering China’s abuses. The three countries’ trade ministers are expected to meet in New York on September 25th, where their leaders will be attending the UN General Assembly.

While changes to the WTO’s rules governing members’ trade practices as well as rules for its own functioning require consensus and would be expected to take a long time to be implemented, there are two pressures giving urgency to the effort.

First, if the US block on appointments isn’t lifted, the AB, which is down to three out of the normal seven sitting judges, will face a crisis, both because its workload is far too burdened to work efficiently with so few judges and because by the end of 2019 it would be down to just one judge, and would be paralyzed.

Second, the threat by President Trump to withdraw the US from the WTO has not been withdrawn, and while Congress would likely move to block a withdrawal, a US notification in itself would be a crisis for the institution.

Meanwhile, the US is coming under scrutiny for failing to comply with existing WTO rules in the one area where it has formally proposed tightening the rules – notification of agricultural subsidies. Although the US has taken the lead in insisting that WTO members be fully transparent and thorough in notifying the WTO of agricultural subsidies, major trading partners now fault the US for failing to do so itself. At issue is the $12 billion-plus in assistance the US government is providing to farmers hurt by retaliatory tariffs imposed by countries hit by the US Sections 232 and 301 tariffs.

The administration could improve worrisome Republican prospects in midterm elections if it settled its outstanding disputes with Japan, the EU, Canada, and the WTO and formed a united front against China’s anti-market policies — but no signs of that yet.

Click here to go to the previous Founders Broadsheet (“Republican congressmen fear losing races because of trade war impact”)