So far, President Trump’s protectionism has been hurting allies, not China, and bailing out Wall Street

The weekly report by trade correspondent L.C.

President Trump announced on January 22nd that he has decided to impose tariff-rate quotas on imports of crystalline silicon photovoltaic cells and modules (“solar cells”) and large residential washing machines and parts. He was doing so, he said, in response to Section 201 safeguard petitions filed by US-based companies hurt by these imports. Under World Trade Organization rules (WTO), to which the US is a party, Section 201 remedies can only be used to provide a temporary period of relief from fair competition to enable a domestic industry to adjust. It is believed that the President will likely take a similarly tough line in other upcoming trade decisions that require his decision – namely, on steel and aluminum. Surprisingly, although the Administration’s rhetoric suggested China is a target, it is not a top supplier of either solar technology or washers to the US market. Chinese companies do, however, produce solar cells and modules in other countries that get exported to the US. This means that Chinese companies were hit by the Trump decree but not workers in China. The President’s protectionism thus has been hurting US allies more than China.

Because South Korea has been hit hard in both cases and Mexico and Canada weren’t excluded, the moves are expected to bring yet another complication to the ongoing renegotiations of the North American Free Trade Area (NAFTA) and Korean-US (KORUS) agreements.

In response, Seoul immediately filed a WTO communication saying “Korea considers these measures to be inconsistent with US obligations under the relevant provisions of the GATT 1994 and Agreement on Safeguards.” Korean officials were blunt in their denunciation. “It is clear that the latest safeguard measures would violate WTO rules,” and “we will actively respond to protectionist measures,” Trade Minister Kim Hyun-chong stated.

Mexico City also responded that it will seek compensation through NAFTA. The Economy Secretariat released a statement saying it “regrets” that the US didn’t exclude Mexico and will “use all legal recourse so that the US complies with its international obligations.” The Secretariat cited the NAFTA provision that enables a country to demand compensation if another party imposes safeguards on its exports.

Although the safeguarded products are not major US imports from China, Beijing expressed “strong” dissatisfaction and is threatening retaliation. Should it decide to retaliate for any of the pending possible US unilateral trade actions, the first to be hurt would be Boeing (China can buy its planes from Airbus), Apple (which is trying to ramp up sales there but faces competition from Chinese companies and government restraints), and soybean farmers (other suppliers are plentiful).

The Europeans also expressed anger, with the European Commission saying it doubts the safeguards meet WTO standards and it will react “firmly and proportionately” to any hit on EU exports from the safeguards.

Multiple objections to both safeguard actions

On the issue of helping the affected industries to adjust, there haven’t been indications yet of the petitioning companies to show serious plans for using the period of relief to adjust to future competition, as they are supposed to under WTO rules and US law. In the solar case, the two companies that petitioned for safeguard protection, Suniva and SolarWorld, are both foreign-owned — the former by a Chinese entity — and are both in bankruptcy.

Reports in the press suggest that the real beneficiaries of the safeguards will be Wall Street firms that own bonds or debt from these companies and stand to gain if they get a short-term bump-up in value from the safeguards and/or are sold. Most analysts do not expect the companies to remain viable beyond the short term. As one analyst put it, the safeguards “may be about boosting the value of the assets before liquidating them.”

Moreover, in both the solar and washer cases, opponents of the safeguards argue that the petitioning companies are facing hard times not because of imports – as the Agreement on Safeguards requires – but because of their own failure to manage their businesses well, innovate to keep up with the competition, and provide quality products. And in the solar case, the Koreans argue that the surge in US imports stems from surging demand, not dumping.

As for the public interest, there have been myriad arguments made by those opposing the safeguards that the safeguard measures would harm the public interest – by raising consumer prices, lowering consumer choices including the choice to use solar power, and causing many more US jobs to be lost than gained. As the head of the Solar Energy Industries Association said, “While tariffs in this case will not create adequate cell or module manufacturing to meet US demand, or keep foreign-owned Suniva and SolarWorld afloat, they will create a crisis in a part of our economy that has been thriving, which will ultimately cost tens of thousands of hard-working, blue-collar Americans their jobs.” Suggesting harm to consumers, LG announced that because “The penalties were more severe than recommended by the ITC,” it was hiking its washer prices by $50. Moreover, it announced it will be scaling back plans for its Tennessee plant, “the most advanced factory in the world,” while noting that the safeguards also harm “iconic American retailers that depend upon the sale of LG washers.”

Solar products manufacturer SunPower, which opposed the safeguards, announced it is putting its planned US factory expansion “and hundreds of new jobs” on hold. The company depends on importing some solar products from Mexico and the Philippines.

Moreover, the President stated that one of his reasons for imposing the safeguards is that he wants to attract more foreign companies to set up solar and appliance manufacturing plants in the US – hardly something that would lessen the competition for the existing petitioning companies to help them adjust! — and not a reason the WTO recognizes for taking such action.

In fact, South Carolina politicians are alarmed at the possible undercutting of the new Samsung plant. Sen. Tim Scott (R-SC), according to his office, “disagrees with yesterday’s decision made by the US Trade Representative (USTR) and is currently evaluating legislative options.”

The Trans-Pacific Partnership (TPP) celebrates a second life

Against expectations, the recently revived 11-country Trans-Pacific Partnership was finalized at a January 22-23 meeting in Tokyo. Ministers from the 11 countries were able to resolve all of the outstanding issues that had emerged once the US withdrew from the pact. The 20 US-demanded provisions suspended after the US withdrew remain suspended, but all the tariff cuts as well as most of the standards and rules provisions in the original TPP have been retained.

In another unexpected TPP development, President Trump twice this week at the World Economic Forum in Davos suggested that the US would consider entering a free trade agreement with TPP countries with which it doesn’t now have one and also might consider joining the multi-country TPP. The former suggestion has been his policy all year – in fact, he promised early in his presidency that he would quickly conclude FTAs with TPP countries, though none has shown any interest. The latter suggestion is certainly new, but he tempered it by adding that it would have to be “substantially better for the US” than the original TPP.

The CPTPP (the new name for the TPP minus the US) is an “open” agreement. It will welcome new members as long as they agree to the deal as made. It is expected that South Korea might be an early applicant, and even Taiwan, while the UK has also expressed interest. But under the currently set conditions, the US could only join if it accepts the finalized agreement, plus reactivation of the suspended provisions.

Neither the President nor his officials have identified what they deemed unacceptable in the original TPP.

Reporters at Davos asked US officials what is going on. Treasury Undersecretary for International Affairs David Malpass explained that “several circumstances have changed during 2017 creating an opportunity to see if there’s a good deal for American workers,” and “China’s economic aggression has intensified globally.” Moreover, the good performance of the US economy “creates negotiating opportunities,” and with the CPTPP finalized, it is “possible to look at what they put together and think about American workers.”

If the US seeks to rejoin on these grounds, it would be an embarrassment for the Administration. It would have to admit it didn’t recognize China’s “economic aggression” previously – which all other participants saw and was a rationale for the TPP in the first place.

Regarding the assertion that the strength of the US economy creates “negotiating opportunities” — meaning, apparently, leverage to win concessions from the other TPP countries — it must be noted that the US is not the top trading partner of any of the TPP-11 other than Canada and Mexico (not even Chile and Peru). China is their number one trade partner, and for some, the US is not even number two.

There is already an enormous amount of intra-regional trade in Asia, and a web of existing trade agreements among TPP countries that they are seeking to deepen and make more efficient and seamless. That’s an important goal apart from bringing the US into the deal. With China being the top trading partner, the TPP-11 are more interested in affecting its behavior than that of the US. A quick signing of the CPTPP will put pressure on China and India to show enough flexibility to conclude the negotiations for the Regional Comprehensive Economic Partnership (RCEP). These have been languishing but are still supposed to conclude this year. The CPTPP agreement puts Japan, Australia, New Zealand, and Singapore in an improved position to push for higher standards in the RCEP than China prefers.

China the trade problem, not allies

But as this publication has said before, adverse US trade and payments deficits are largely caused by poor tax policy (and over-regulation). Now that the Trump administration has addressed both issues, only China’s state-managed economy remains a major trade problem for the US and its allies.

The fact that Administration officials didn’t try to walk back Trump’s favorable remarks on the TPP suggests that there probably is some rethinking going on in the White House.

Nevertheless, Japanese officials quickly made it clear that if the US goal is to disrupt the CPTPP, they don’t intend to let that happen. Several high-level officials commented on Trump’s remarks by signaling that they won’t delay the formal CPTPP signing in March. Foreign Minister Taro Kano said Japan “would like the US to come back, but we want to bring [the CPTPP] into effect properly” first.

It should be noted that the CPTPP gives a quick boost to the efforts by Canada and Mexico to diversify their trade away from the US now that NAFTA’s continued existence has been put into doubt by President Trump. It also gives those two countries a basis for their future bilateral trading relationship should NAFTA fail.

US Commerce Secretary Wilbur Ross in public comments in Davos raised the possibility of reviving negotiations for the Trans-Atlantic Trade & Investment Partnership (TTIP). Declaring that the Administration doesn’t oppose all large trade deals, he said “It wasn’t an accident that we didn’t walk from TTIP” – not quite accurate since the President has consistently stated he opposes all multi-country deals.

Ross has taken the lead in discussing the TTIP before, and the recent conclusions of EU trade deals with Canada and Japan should encourage this. All the same, there have yet to be indications that the Administration is seriously considering TTIP reengagement. Indications that the President himself was looking to reopen the TTIP were doused by his January 28th interview with British TV. “I’ve had a lot of problems with EU,” he said, without specifying them, “and it may morph into something very big from… a trade standpoint. We cannot get our product in. It’s very, very tough. And yet they send their product to us – no taxes, very little taxes. It’s very unfair. They’re not the only one, by the way. I could name many countries and places that do. But the EU has been very, very unfair to the US. And I think it will turn out to be very much to their detriment.”

Meanwhile, the US continues to stymie the functioning of the WTO by blocking the appointment of Appellate Body judges. Supposedly the US is doing this to force reforms, but meanwhile it has been obstructing solutions offered by others, including a Mexican plan backed by 58 WTO members.

Click here to go to the previous issue of Founders Broadsheet (“Important news: President Trump is considering rejoining the Trans-Pacific Partnership”)