The weekly trade report with L.C.
With the world economy threatened with a major recession in the wake of the Wuhan coronavirus (“COVID-19”), the US has an important role to play in fostering a stable employment, trade and monetary environment. While it’s likely that the virus will spread to all the world’s countries, the rapidity of its spread can surely be reduced. This will give the medical and business communities more time to put emergency measures in place and diversify supply chains. Ideally, containing the coronavirus’s spread and impact will be predominantly market- rather than protectionist-driven.
Measures to be taken
Three types of efforts will be required:
- Containment measures adopted at federal, state, and local levels that are supported by the majority of the population. This implies measures that are neither too permissive nor draconian. China is a case study in how not to proceed. It was too permissive at first, allowing the virus to spread widely, then too draconian, reducing compliance and government credibility.
- The White House providing stability rather than disruption to world trade. This could best be achieved by working with allies to settle on reforms that enable the US to return to full support of the World Trade Organization (WTO).
- The Federal Reserve and Treasury coordinating with their advanced sector counterparts to provide exchange rate stability so that currency chaos does not further exacerbate the uncertainty facing businesses regarding investment decisions.
Supply chain worries in the health sector
One sector that would greatly benefit from a managed slowing of coronavirus expansion is the medical industry. The coronavirus, or COVID-19, has raised to particular prominence the issue of US reliance on China for drugs and, especially, the precursor ingredients that go into US medicines as well as medical equipment.
The concern has been around for a long time, both from the standpoint of the lack of quality controls and standards-monitoring in China, posing a health and safety risk, and the risk of China blocking export of essential items, as has just happened with facial masks. Even when not deliberate, China’s COVID-19-induced shutdown of much of its manufacturing capacity is leading to a shortage of products vital to the US drug and medical device sectors, not to mention other industries.
Navarro and supply chain diversification
White House trade adviser Peter Navarro has taken the lead in pressing for changes, openly using the COVID-19 crisis to push to end the China-dependency of US pharmaceutical companies.
Navarro told reporters this week that since the virus outbreak, he has been thinking “strategically about moving our supply chains on-shore for our essential medicines… for our public health and economic and national security.” He is reportedly circulating papers on the matter to other White House officials, though it is not clear what remedies might be under consideration, and shifting these medical supply chains wouldn’t be quick or easy. Meanwhile the pharmaceutical sector is under threat for a separate reason — the White House threat to compel a lowering of drug prices.
Inasmuch as the virus has exposed vulnerabilities in the US supply chain that go beyond the medical arena, it could energize a wider push to lessen US manufacturers’ dependence on China. But again, that wouldn’t be a speedy process, given the reliance of many US industries on both buying intermediate goods from China and selling finished goods to it.
Rubio bill
On February 27th, Sen. Marco Rubio (R-FL) announced that he will introduce a bill aimed at limiting US dependence on China for drugs and medical devices. The legislation will require drug manufacturers to provide information to the Food & Drug Administration on the source of the active ingredients in a drug and would apply Buy America Act preferences to pharmaceuticals so that the country-of-origin would be determined by where the active ingredients are sourced, not where the final manufacturing occurs. The legislation also will include provisions making it easier to manufacture drugs and medical equipment in the US.
Huawei, ZTE measures
Meanwhile, the Senate passed unanimously on February 27th the Secure & Trusted Communications Networks Act. The bill passed the House unanimously in December. The bill now goes to the president for his signature. It gives the Federal Communications Commission $1 billion to grant to rural carriers to rip out and replace any Huawei or ZTE equipment in their telecom networks. The bill also bars the use of federal funds to buy communications goods and services from any company deemed to be a national security risk, that is, the Chinese companies.
Steel users suit likely to go to Supreme Court
But tariffs of questionable national security purpose have caused great distress for the many manufacturers affected by the measures. On February 28th the US Court of Appeals for the Federal Circuit rejected the suit brought by the American Institute for International Steel against the president’s use of Trade Law Section 232 to restrict steel imports. The suit challenged the authority granted to a president under Section 232 as an unconstitutional delegation of congressional responsibility. The AIIS is expected to appeal to the Supreme Court of the United States.
The Court of Appeals ruled against the AIIS, citing the precedent of the 1976 Supreme Court (SCOTUS) ruling in the case of Federal Energy Administration v. Algonquin SNG. That ruling approved congressional delegation of authority to the president.
Does delegation violate separation of powers?
The AIIS will ask SCOTUS to reverse that precedent and find that the congressional delegation of authority is unconstitutional. The Court of Appeals noted that five SCOTUS judges have expressed interest in revisiting the non-delegation doctrine, but that doesn’t enable the Court of Appeals “to disregard the current government precedent.”
A Cato Institute analyst said the AIIS case is “a heavy-hitting separation of powers case that implicates [the] non-delegation doctrine which a critical mass of justices” are interested in. But other observers noted that the Supreme Court generally isn’t eager to engage in matters related to national security, so it is unclear how SCOTUS might rule.
Meanwhile, at least six US companies have now filed lawsuits at the Court of International Trade seeking to have the tariffs imposed on steel and aluminum “derivative” products declared unconstitutional and illegal.
US-India: security solidarity but not yet trade
A trade deal with India would help diversify the US supply chain beyond China. Unfortunately, President Trump’s two-day visit to India, February 24th-25th, did not lead to the announcement of a trade agreement. By the time the President departed on his trip, it was clear that the two sides remained too far apart.
Despite the lack of success on trade, the trip did result in India’s commitment to purchase over $3 billion in advanced US defense equipment — with more defense sales anticipated — and in some new energy purchases. The two leaders also appeared to further cement the US-India strategic relationship, obviously something important to both countries. “Together the prime minister and I are revitalizing the Quad initiative… to ensure a free and open Indo-Pacific.” (The Quad is the US-Japan-India-Australia strategic alliance.) The president also told the Gujarat rally that bilateral relations are “truly stronger than ever before.” He also reported that the US and India agreed to expand cooperation on counterterrorism, cybersecurity, maritime security, and energy, including nuclear energy. Modi declared that “Our defense manufacturers are becoming a part of each other’s supply chains.”
L.C. reports on trade matters for business as well as Founders Broadsheet.
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