Trade correspondent L.C. reports:
The President’s threat to impose Section 232 (national security) tariffs on automotive imports moved to the front of the trade agenda this week. His main target seems to be imported German cars, but Japan and South Korea are worried they might also be hit.
New auto tariffs are widely opposed by the US auto industry, agricultural associations, economists, and many in Congress from both parties. They fear retaliation from trade partners and more expensive supply chains.
There is also concern that the economy and stock market will suffer at a time when both seem vulnerable.
Last week the bond market yield curve inverted, a signal that a recession is likely in the next year or so. A yield curve inversion occurs when the interest rate on 10-year US Treasuries becomes lower than the interest rate on 3-month Treasuries. The inversion indicates investors’ expectations that production will decline and long-term investment opportunities dwindle as the recession takes hold. Instead of investing in new production and jobs, investors flee to safe, long-term US Treasuries, driving the price up and yield down. This creates an interest rate inversion as a side effect.
The president’s Fox Business TV interview
President Trump in a March 22nd Fox Business TV interview was asked: “[T]he Commerce Department is looking at autos and auto parts and whether or not they pose a national security risk. Do they?”
The president responded,
“Well, no. What poses a national security risk is our balance sheet [the US global trade deficit]. We have to have – we need a strong balance sheet. Otherwise you don’t have national security. So people are always saying, ‘Well, what do cars have to do with national security?’ When Germany is sending cars and we virtually don’t tax them, and yet they won’t accept our cars…[T]he EU…treats us as badly as China…. The numbers are just smaller by a lot – [W]e lost, over the course of the last five, six, seven years, $150 billion a year with EU. They don’t take our product. They tax us tremendously. They tariff us tremendously. Almost every country has taken advantage of the US — and we’re straightening it out.”
This denial of a direct national security threat from autos could give ammunition to those challenging Section 232 auto tariffs. If the existence of a trade deficit becomes a national security threat, Section 232 measures could be imposed against any imports at all.
The EU has proposed that the two sides eliminate all vehicle tariffs, but the President opposes the idea on the grounds, odd for a Republican, that he wants the government involved in consumer commercial decisions: “The problem is that the Chevrolet will never be accepted in Europe like the Mercedes is accepted here, so [zero-for-zero] is not a good deal.” The president lauded the high 25% tariff the US imposes on European light trucks: “[T]hat’s a great thing for us…that’s our best segment by far. And yes, we will absolutely be able to keep it.”
He reconfirmed that his objective in trade talks is to force production to the US. Asked if he’s concerned that a tariff would disrupt supply chains, he said: “Sure it does. But… I’ll tell you what the end game is. They’ll build their plants in the US, and they have no tariffs…I would do [zero tariffs] for certain products, but I wouldn’t do it for cars — because they have BMW, they have Mercedes, they have a lot of very good cars that come in…[T]hey [also] make them here. I want them to make [all of] them here.”
Under free trade, manufacturers locate factories and manage supply chains with economic efficiency foremost in mind. Under managed trade, governments seek to bend the decisions of private industry in order to favor local constituencies, regardless of efficiency considerations. But the largest constituency – consumers – inevitably get slighted in the process, with higher prices, lower choice, or both.
The president also continued this week his fight with General Motors over its closure of its Lordstown, Ohio, plant. In a series of tweets he blamed both the GM CEO and the United Autoworkers union leaders for the closure and demanded that the plant be “open,” saying, “Close a plant in China or Mexico… but not in the USA. Bring jobs home!”
GM management reported last year that it is being forced to close plants because of the cost of the [president’s] steel and aluminum tariffs.
A country that reduces its economic efficiency by measures favoring special interests – as Argentina did under Peron – is damaging its long-term national security. The protected sectors become less competitive internationally. This worsens the saleability of the nation’s exports and thus ultimately damages the nation’s current accounts balance. These are effects opposite to what the president intends – a familiar outcome of most government interventions.
US-China tariffs to stay, end of April deal still in sight
Meanwhile, President Trump told reporters on March 20th that the Section 301 tariffs against China will remain even once a deal is struck:
We’re not talking about removing them. We’re talking about leaving them for a substantial period… because we have to make sure that… China lives by the deal. They’ve had a lot of problems living by certain deals….We’re taking in billions and billions of dollars right now in tariff money, and for a period of time that will stay.
The president hasn’t yet made clear whether he’s referring to the $50 billion in tariffs that cover imports of Chinese machinery, electronics, and information and communication technology (ICT) or the $200 billion tranche that is more focused on commodities and materials. While the president may think it’s useful to target Chinese tech goods, the US Chamber of Commerce recently released a study indicating that keeping the tariffs on the $50 billion tranche would damage the competitiveness of the US ICT sector.
That “billions and billions of dollars” the president says the US government is taking in is coming out of US not Chinese pockets. It’s a tax partially negating the 2018 Tax Reform.
Hopes for a US-China trade deal have now been reset to the end of April.
Europeans and Japanese share most US demands against the Chinese government’s violation of trade norms. The president could actively foster this unity, but he must take care to not undercut it by overly antagonistic US-EU and US-Japan trade talks.
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