The weekly trade column with correspondent L.C.
Both President Trump and his trade adviser Peter Navarro are against the use of tariff relief as a stimulus to stem the economic decline that the coronavirus epidemic has caused.
After the president dismissed the mounting number of demands for removing his unilateral tariffs, late on March 20th in a seeming change of heart, the US Trade Representative (USTR) office released a statement saying it is considering removing some of the Section 301 tariffs on medical items. Action wouldn’t be immediate, however: the statement called for public comments and made them not due until June 25th. This gave new meaning to the phrase “slow walking.”
Pressure on the administration was stepped up this week when the Americans for Free Trade coalition, representing about 150 business organizations, wrote to the president urging suspension of the Section 301 and Section 232 tariffs: “We urge you to provide tariff relief as one of the measures to help those hurting financially from the economic effects resulting from the current public health crisis.” Providing such “tax relief to millions of American farmers, manufacturers, families, and consumers” would not have to “wait on action from Congress.” Separately, the NAM has also called for tariff relief.
Who’s paying for the tariffs?
The president was asked about the letter at a March 18th White House press conference. He replied, “China is paying us billions and billions of dollars in tariffs, and there’s no reason” to remove the tariffs. “They haven’t even spoken to me about that. I can’t imagine Americans asking for that. It could be that China will ask for a suspension or something. We’ll see what happens. China is having a very rough time.” Then he questioned the credibility of Americans for Free Trade, saying, “Who heads that group?” and implied it actually represents foreign countries. “Those countries do [want tariff relief]. Go check, I’m sure.” His trade adviser Peter Navarro told reporters that “To eliminate or lower the China tariffs now would amount to a bailout for the China economy.”
But is China paying the tariff bill? Not according to Daniel J. Ikenson, Cato’s director of the Herbert A. Stiefel Center for Trade Policy Studies, who writes:
Contrary to Trump’s claims, that money didn’t “[come] into the USA.” The products came in, but the money was already here. It was transferred as a tax from importers—U.S. producers, U.S. wholesalers, and U.S. retailers—to the U.S. government. By raising the costs of manufacturing inputs or final goods purchased by U.S. importers, the tariffs—in every case—amount to an increase in U.S. producers’ costs of production and/or an increase in Americans’ cost of living. Businesses were made less profitable (which means less investment and less hiring) and individuals and families experienced lower real income, on account of higher prices (which means less consumption and less savings).
Senator Grassley weighs in
Yet the pressure continued. Senate Finance Committee Chairman Chuck Grassley (R-IA), when asked by reporters on March 16th what trade actions he thinks Congress and the White House should consider, responded, “I would just give a short answer: consider tariff relief.” On the House side, Reps. Stephanie Murphy (D-FL) – who has previously pressed for tariff relief – and Joe Cunningham (D-SC) called for including tariff relief in the stimulus bill currently being crafted in Congress. Yet reporters were told by congressional aides that the president has told legislators that he’s interested in measures to stimulate the economy, not tariff relief.
Those proposing tariff relief as a response to the coronavirus see two benefits: it would help in acquiring needed medical supplies, and it would separately act as an economic stimulus. Those focusing on the former are calling for removing just some of the Section 301 tariffs on China. Those focusing on the latter are calling for more of the Section 301 tariffs and the Section 232 steel and aluminum tariffs to be lifted.
Some countries are adopting export restrictions
While the USTR may be looking to ease trade restrictions somewhat in response to the health emergency, other countries are undertaking their own unilateral moves centered on restricting exports of medical-related items. Some countries began doing so earlier (Russia, India). After Germany and France joined them, the EU left the export decision up to individual member nations but ordered them not to withhold shipments from other EU members. That move greatly angered countries like Serbia that are in the process of acceding to the bloc but are not yet members. China is taking advantage of the situation by immediately stepping in to offer its own supplies. The tensions these trade moves are provoking within the EU could have longer-term implications for the viability of the bloc.
The push for export restrictions was noted by Grassley, who told reporters that about 20 countries have imposed them on medical materials. “It’s a bad cycle,” he said. “Restrictions reduce global supply, lead to higher prices, and that would trigger more restrictions and even higher prices.” This will, he warned, hurt health care globally as well as having a bad economic impact. He called on the President and other leaders to develop a coordinated response “before we see a future domino effect from export restrictions that leaves everyone worse off.”
Suggestions amid overall pessimism
Other suggestions that analysts have put forward for easing trade policy in the crisis, beyond removing tariffs and export restrictions, include allowing otherwise WTO-illegal subsidies so that governments can encourage production of needed medical products and supplies, easing some intellectual property rights protections on needed medicines, allowing easier border-crossing for medical workers, and waiving the Jones Act, which requires goods traveling between US ports to be carried on US vessels.
Even if the worst unilateral and protectionist responses are contained, the crisis threatens to slash global trade and follow the world economy into an abyss.
Borders
Washington and Ottawa announced on March 18th, effective March 21st, the US-Canada border will be closed to all “non-essential travel.” A similar announcement was made by Washington and Mexico City on March 20th. The move is not quite as draconian as it sounds, however, since cross-border trade won’t be affected and neither will business travel. In fact, there remains some ambiguity regarding what is included in “non-essential” travel. The good news is that the two border agreements were arrived at by mutual agreement rather than unilateral declaration.
US-China tensions worsen
Unsurprisingly, the coronavirus outbreak continues to cause US-China relations to deteriorate. It appears increasingly unlikely that the two countries will even enter negotiations for a Phase Two trade agreement, let alone conclude it. Nonetheless, implementation of the Phase One agreement is proceeding. The Agriculture Department reported on March 20th substantial new sales of corn and wheat to take place in the 2020-21 marketing year, which is welcome news to US farmers and in line with the agreement. Separately this week, the US agreed at the WTO to give China more time to comply with the WTO ruling against its tariff-rate quota regime for rice, corn, and wheat (until March 29th). China lost the ruling but didn’t appeal and promised to comply. The US allowing more time for it to do so was regarded as a congenial gesture.
Less conducive to good relations was Beijing’s move this week to ban the journalists it expelled from the mainland from working in Hong Kong. Banning the journalists was seen as a warning to other foreign journalists not to publish news unwanted by Beijing. Some speculated that this includes news that China has not been as successful in containing the COVID-19 outbreak as it has been boasting.
But the expansion of the ban to Hong Kong is particularly explosive since it contravenes Hong Kong’s status as having independent control over its immigration policy and thus a violation of the “one country, two systems” agreement.
Diversifying away from China dependency
Meanwhile, COVID-19 has provoked two different responses to dependence on supply chains out of China that the outbreak has highlighted. At the White House, it has reportedly provided an opportunity for trade adviser Peter Navarro to promote his plans for a Buy American Executive Order mandating that medical and pharmaceutical products purchased by the government be sourced domestically. The Daily Beast reported this week that Navarro is running into intense push-back within the Administration from some, including economic adviser Larry Kudlow and Treasury Secretary Steven Mnuchin, who argue it would cause more harm than good by cutting off needed US supplies.
On Capitol Hill there are related moves to try to alleviate US dependence on China for pharmaceuticals and their components. Sen. Marco Rubio (R-FL) introduced a bill to require the Defense Secretary to submit to Congress a report on his department’s reliance “on certain pharmaceutical products made… in certain countries, [and] to establish post-market reporting requirements for pharmaceuticals.” Separately, Sen. Tom Cotton (R-AR) introduced a bill “to require the Health & Human Services Secretary to maintain a list of the country-of-origin of all drugs marketed in the US, [and] to ban the use of Federal funds for the purchase of drugs manufactured in China.” In fact, China isn’t the US’s main foreign source of drug and medical products. The much larger suppliers are Ireland, Germany, Switzerland, Mexico, India, and Italy. For pharmaceuticals, China was the 15th largest source for the US.
Tokyo wants the TPP to grow
According to Japanese press reports, Japan is preparing to push for more Asian countries to join the Trans-Pacific Partnership, targeting Thailand, Taiwan, Indonesia, and the Philippines. After seeing the risk of over-reliance on Chinese supply chains that hit Japanese automakers particularly hard when the COVID-19 crisis emerged, Tokyo has been seeking greater diversification. Japanese companies’ dependence on China, especially for auto parts and other intermediate goods, has grown in recent years and is now seen as an urgent issue that can be best remedied by relocating production to other Southeast Asian countries.
Acceding to the TPP is not an easy process. All existing members must agree to allow the new country in, and the candidate country must agree to abide by all existing TPP provisions without seeking changes. Still, after the US left and the TPP-11 countries implemented the deal among themselves, they suspended some 11 provisions that had been demanded by the US. These were the provisions the other countries had found most onerous and had agreed to only because it was necessary to keep the US in the pact. So it should be a bit easier for new entrants to join than it would have been had the US not left and those provisions not been suspended.
RCEP pushes forward, with China’s help
The countries negotiating the Regional Comprehensive Economic Partnership (RCEP) are pushing ahead to finish this year, probably without India. Meanwhile, China is promoting the regional deal while also asserting leadership in other trade liberalization arrangements, apparently taking advantage of the fact that the US appears to be withdrawing from international engagement even more than previously, due to the COVID-19 crisis.
L.C. reports on trade matters for business as well as Founders Broadsheet
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