Ninety-day truce with China, Trump’s risky NAFTA threat

Trade correspondent L.C. writes:

The meeting between Presidents Donald Trump and Xi Jinping at the Group of 20 (G20) meeting in Buenos Aires resulted in the outcome predicted just before the event: the US will delay for 90 days its planned January 1st hike from 10% to 25% of the tariffs currently imposed on $200 billion of Chinese imports, and it won’t slap tariffs on the remaining $267 billion of imports. This is in exchange for vague promises by China to increase its imports from the US and perhaps address US complaints over structural issues and abusive practices.

President Trump released a personal statement saying, “This was an amazing and productive meeting with unlimited possibilities for both the US and China. It is my great honor to be working with President Xi.”

According to a White House statement issued after the event, China promised to “purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other products from the US to reduce the trade imbalance” and that “President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days. If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%.”

Chinese State Councillor Wang Yi’s press briefing, however, did not confirm the specifics in the White House statement.

As January 1st approaches, the US business community has become more and more vocal about wanting to see a resolution rather than an escalation in the trade spat with China. Wall Street is already relieved and happy with the Buenos Aires outcome. The views of Trump’s advisers are not yet known. China hark Peter Navarro was in the meeting with Xi, and he and Lighthizer are probably unsettled by the vagueness of what they got from China. They might fight to revive the tariff hikes if China doesn’t make real changes.

The President will also be under pressure from Capitol Hill, where Democrats have been warning him not to come home with a meaningless deal based on more talking. Earlier in the week Senate Minority Leader Chuck Schumer (D-NY), Finance Committee ranking Democrat Ron Wyden (D-OR), and Sen. Sherrod Brown (D-OH) sent the President a letter warning against taking a soft line with Xi. As Schumer separately said, “Backing off on China for some quick handshake agreement, without substantive, real, deep commitments, will be seen as a victory by no one. It will be seen as capitulation.”

The President’s trade truce is also facing criticism from some in his journalistic base.

China’s ZTE and Huawei

Meanwhile China’s ZTE has grabbed attention of US legislators again. Sens. Chris Van Hollen (D-MD) and Marco Rubio (R-FL) wrote to the secretaries of Treasury, State, and Commerce. requesting an investigation into whether China’s ZTE once again violated US sanctions when it helped Venezuela set up a data base to track citizens, and thus violated the agreement reached earlier this year with the Commerce Department. ZTE “may have violated US export controls and sanctions law” as well as the agreement. And it may have worked with Venezuelan officials that are under US sanctions and helped violate human rights. Presumably, if a new violation is found, the existing agreement will be ended in favor of stiffer penalties barring ZTE from doing any business with US companies. Separately this week, New Zealand followed Australia in blocking the use of Huawei equipment in the country’s changeover to 5G networks, another blow to China’s leading high-tech telecom equipment companies.

NAFTA / USMCA

Also on the sidelines of the G20 summit: the leaders of the US, Canada, and Mexico signed the United States-Mexico-Canada Agreement (USMCA).

President Trump, in his remarks at the signing and his tweets the same day, appeared to believe that the USMCA is a huge departure from NAFTA and of world-historic significance: “This is a model agreement that changes the trade landscape forever,” he said. And tweeted: “Just signed one of the most important, and largest, Trade Deals in U.S. and World History…. The terrible NAFTA will soon be gone. The USMCA will be fantastic for all!”

The following day the President dashed this welcomed news with a surprise announcement:

“I will be formally terminating Nafta shortly,” he told the press on Air Force One, referring to the current pact that is still in force until Congress approves the new deal with Mexico and Canada that Mr. Trump signed Friday. “And so Congress will have a choice of the [new] USMCA or pre-Nafta, which worked very well.” The Wall Street Journal editorial reporting the President’s surprise announcement (“NAFTA Suicide Note”) comments:

By “pre-Nafta” [the President] means the continental trade rules in force before 1994. That would mean the immediate reimposition of tariffs and import restraints on a vast amount of trade. It would be an economic shock that could well send the economy into recession. As a political matter it amounts to Mr. Trump holding a gun to his own re-election chances and daring Democrat Nancy Pelosi to let him pull the trigger….Mr. Trump needs the current Nafta in place as insurance in case Mrs. Pelosi and House Democrats decide to defeat, or perhaps even fail to take up, the new Nafta deal. Democrats will be only too happy if Mr. Trump blows up old Nafta before a new one passes.” He will get the blame for the resulting unemployment and recession.

USMCA passing Congress is not assured

Indeed, despite the Buenos Aires signing by the three countries’ leaders, hurdles remain. The deal won’t enter into force until it is ratified by the legislatures of the three countries. That’s not expected to be a problem for Mexico or Canada, but it remains unclear how the USMCA will fare in the new Congress. Under fast-track procedures, it need only gain a majority in each chamber, with a vote occurring after limited debate, and can’t be amended. The House acts first, as always with bills related to revenue.

The most vocal opposition to date comes from the progressive wing of the Democrats, including those expected to run for President who cater to the party’s left wing. Many long-tenured members who have always been trade hawks opposed to almost all free trade agreements have come out saying they won’t support the USMCA without significant changes. These mainly pertain to stronger labor and environmental standards, tougher enforcement requirements, even tighter auto rules-of-origin relating to Mexican wages, and prevention of outsourcing of jobs. National unions and environmental groups have come out strongly opposed to the USMCA, and other activists oppose certain parts of it such as the extended patent protection for biologic drugs.

In his remarks at the G20 signing, Prime Minister Justin Trudeau, addressing the President, noted the recently announced General Motors (GM) plant closings and said this is “all the more reason why we need to keep working to remove the tariffs on steel and aluminum.” But the White House wants to protect the metals tariffs that they believe have been successful in protecting domestic suppliers.

Both Ottawa and Mexico City are reported to now be willing to accept quotas. Apparently the issue in the ongoing talks is how high they will be. They, naturally, want to set quotas far above the level of recent steel and aluminum exports to the US to enable their exports to grow. But Washington has been pushing for more stringent quotas, with the Canadians pushing back by pointing out that at least regarding aluminum, the US is far from being able to meet domestic demand; restrictions on Canadian aluminum would mean that the US would import more from other countries.

The President was particularly incensed at statements by General Motors (GM) officials suggesting that the Section 232 steel and aluminum tariffs have caused it to lose about $1 billion this year. In tweets and interviews, he denied this was true, blamed GM for its problems, and openly threatened to retaliate against the company.

Many analysts, as reported in various articles this week, believe the USMCA rules-of-origin will encourage the relocation of some plants to the US but will entail higher vehicle prices and, especially coupled with other new tariffs and retaliatory tariffs, lead to lower exports of US-made cars. If that is what emerges, the President will be in conflict with auto companies into the future as they rationalize production in the face of declining sales and rising input costs. The US trade moves are causing many US companies to rethink their supply chains. Many are moving out of China – a process under way for a while due to rising labor costs and other factors – though mostly to Southeast Asia and Mexico rather than to the US. Manufacturers are also attracted to Asian countries and Mexico because those countries are negotiating new free-trade deals while the US is not, meaning more imported inputs and exports of finished products will trade duty-free from those locations.

Meanwhile, the US trade deficit set a record in October.

Click here to go to the previous Founders Broadsheet (“President unconcerned with tariff effect on economic outlook”)