Strategic materials war with China, US free trade negotiations with allies

Trade correspondent L.C. reports: The White House formally notified Congress on October 16th that it intends to begin free trade negotiations with three important allied trading partners: Japan, the EU, and the UK. Allied solidarity is crucial as China rushes to lock up strategic raw materials worldwide while resisting US efforts to reform its state-dominated trade practices.

Trade war with China expands to strategic materials

The Chinese dictatorship is seeking to dominate the world’s supply of strategic metals: lithium (see here and here), cobalt (here and here), and rare earths (here and here ).

Australia’s Lowy Institute explains how Chinese military and commercial policy are one piece in seeking to dominate and loot the resource-rich continent of Africa:

“In the past decade, China has cemented a dominant position across Africa by supplanting the West as a leading trading partner, investor, and lender to African states….Nowhere is the complexity of Chinese involvement more pronounced than in the DRC [Democratic Republic of Congo]. [DRC President Joseph] Kabila himself trained at the PLA [People’s Liberation Army] National Defence University in Beijing and has been a reliable ally for China. Many of the instruments used by his security apparatus were supplied by Beijing. Chinese largesse also creates opportunities for corruption. Reports allege that hundreds of millions of dollars went missing from the Chinese–Congolese joint venture Sicomines. Kabila has ruled since 2001, amassing a fortune for his family and allies at the expense of an increasingly angry and restive population.”

A consensus is emerging that both the US and China are preparing for a long-term trade war and that a Trump-Xi meeting at the late-November G20 Summit is unlikely to solve anything. The US may even be looking to basically disengage the US economy from its current level of integration with China, something that would have broader implications for the global economy.

A late report by Axios reinforces this view, stating that President Trump believes the US has the upper hand and his policy is now to inflict as much pain as possible on Beijing so that it will eventually give up and offer concessions in the areas demanded by Washington. China, on the other hand, has been preparing for such a fight and is willing to sustain a lot of pain and inflict some in return but is not willing to allow itself to be “contained” by the US. It may be difficult for Beijing to sustain such a stance given its weakening economy and underlying vulnerabilities, but it also remains the case that it has quite a few tactics it has not yet used to hurt US companies and the US economy.

Thus, while the US government will be extremely busy in the coming year on the trade front — getting the USMCA (NAFTA 2.0) through Congress, starting negotiations with Japan and the EU, and fighting lonely but intense battles in WTO dispute settlement, it may also be engaged in a profound and consuming battle with China. It is not clear that the US population – or economy – will be able to sustain the pain China intends to inflict or that the US government is prepared to handle so many trade battles at once.

There are some voices trying to tamp down US-China tensions. Defense Secretary Jim Mattis, heading to an Asia defense meeting, told reporters on October 15th that the US is “not out to contain China.” Rather, “We seek a relationship…that’s grounded in fairness, reciprocity and respect for sovereignty….We are going to have to find a way to productively manage our relationship.” His remarks were seen as an effort to ease friction, especially following the aggressive strategic speech earlier this month by the Vice President.

Also this week, Senate Majority Leader Mitch McConnell (R-KY), in an October 17th interview with Reuters, while suggesting China has been trading unfairly – “eating our lunch for years” – also called for a quick end to the skirmish. “The tariffs are beginning to have some impact in a negative way so I hope that we make some progress quickly on some of these other fronts, in particular with China.” He also said he hopes Section 232 tariffs won’t be imposed on autos. His remarks appeared to be a warning that many outside the Administration are not looking for the US to escalate to a “long-haul” trade confrontation with China.

White House formally notifies Congress of trade negotiations with allies

Under rules of the 2015 Trade Promotion Authority law, the US Trade Representative Robert Lighthizer must publish its detailed objectives by December 15th. The talks can officially begin on January 14th, 2019.

The notifications for the three negotiations were expected. It was understood that the President wanted the process to be launched before the mid-term elections to fulfill his promise to enter bilateral talks to gain further access to foreign markets. This is especially important given the pain US exporters have faced due to the counter-tariffs provoked by the US’s Section 232 and Section 301 actions.

However, none of these new trade talks are expected to be easy. In fact, disputes have already surfaced with Tokyo and Brussels over scope, while London can’t begin to talk until after Brexit takes effect on March 29th. If the Brexit agreement involves forming a customs union with the EU, it won’t have freedom to negotiate free trade agreements (FTAs) on its own anyway, since customs unions entail common external tariffs.

But today’s Wall Street Journal reports some possible US-EU gains that might be achieved sooner rather than later:

“U.S. Trade Representative Robert Lighthizer hopes for ‘an early harvest in the area of technical barriers to trade’…One path to quick results is to resurrect past agreements. During three years of talks on the proposed Trans-Atlantic Trade and Investment Partnership, which collapsed in 2016, the two sides reached some preliminary agreements on standards, which got filed away. Officials could claim results by plucking out ‘an agreement somewhere in the drawer’ and presenting it as a deal, an EU official said. ‘We have done, over the years, a lot of preparatory work,’ [EU Commissioner for Trade Anna Cecilia] Malmström said on October 5th. ‘There are certain things that are quite low hanging fruits.’”

Two large vexations lurk over these coming talks. The US has not removed its “national security” tariffs on steel and aluminum even for close allies Japan and the EU and has not removed its threat of such tariffs on automotive products from these trading partners. It did suggest to them that as long as fruitful trade talks are taking place, the auto tariffs won’t be imposed. But there are no guarantees, and there are reasons to think that the tariffs will only be permanently waived in exchange for voluntary export quotas, an anathema to Japan and the EU as well as to the WTO.

The US has already made it clear that one goal of the talks with Japan will be to get auto concessions, both for gaining market access to Japan and, especially, for slowing the export of vehicles from Japan to the US.

Also promising to be contentious with Japan, and likely also the EU and UK, is the US effort to include in future trade agreements the USMCA provision crimping trading partners’ ability to engage in trade negotiations with China. It remains to be seen how hard the Trump Administration will push for this – and what the pushback from others might be. Tokyo is already engaged in trade talks with Beijing through the Regional Comprehensive Economic Partnership (RCEP), and there is talk of reviving the long-stalled talks for the trilateral China-Japan-South Korea FTA as well.

WTO cases filed against US steel and aluminum tariffs

In a big although expected step, the WTO cases filed against the US Section 232 steel and aluminum tariffs and the US counter-cases are now moving to center stage.

At issue in all these cases is the WTO’s “national security exception” – GATT Article XXI — that says countries can impose otherwise WTO-illegal trade barriers if necessary for national security. But Article XXI leaves the definition of national security up to the individual country.

The WTO founders assumed the exception wouldn’t be abused. But the US did just that, despite its own Defense Department denying any military justification for the steel and aluminum tariffs.

The complaints against the US, which are all similar, allege that the US is improperly appealing to the WTO’s national security exception to undertake what are clearly protectionist actions.

In this dispute, there is no good outcome for the WTO. Either the WTO will rule in favor of the US, in which case there will  be a free-for-all as other countries impose their own barriers justified by national security arguments, or it will rule against the US, in which case Washington may flout the result, leading also to weakening the WTO and trading partner retaliation.

The best outcome — from the standpoint of the WTO, US manufacturers and consumers, and foreign steel and aluminum exporters – would be for the President to drop the militarily unjustifiable tariffs.

The USMCA, a.k.a. NAFTA 2.0

The White House is eager to finish the NAFTA renegotiation well before the US mid-term elections so the President can have a trade victory to show the voters. He wants to hold a symbolic but substance-less signing ceremony with the Mexican and Canadian leaders before November 6th to highlight the success. But the effort is running into resistance as Ottawa and Mexico City indicate they won’t join such an event unless the steel and aluminum tariffs are lifted for them first.

US plans exit from Universal Postal Union (UPU)

The US has begun withdrawing from the UN’s UPU, which sets international postal rates. The move was not a surprise – it was under consideration for months – and was seen as another blow to China, which is the main beneficiary of the extra-low subsidized rates charged for small parcels (under 4.4 pounds) mailed to the US from developing countries.

US business largely praised the move, with the National Association of Manufacturers (NAM) applauding President Trump and pointing out that “this outdated arrangement [dictated by the UPU] contributes significantly to the flood of counterfeit goods and dangerous drugs that enter the country from China. Manufacturers… will greatly benefit from a modernized and far more fair arrangement [for postal rates] with China.”

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