Trade in split Congress likely to be bipartisan but protectionist

Trade correspondent L.C. reports:

In the wake of the highly partisan US midterm elections, trade is one of the few areas where bipartisanship is possible. Most observers believe that Congress will pass the US-Canada-Mexico (USMCA, a.k.a. NAFTA 2.0) implementing bill during 2019. It is also likely that Congress will approve the start of trade talks with Japan, the EU, and later the UK. Congress will insist that these talks follow the guidelines laid out in the 2015 Trade Promotion Authority bill in terms of goals and, especially, the required close consultation with Congress. It does not appear likely that legislation to curb the President’s unilateral trade powers will make headway this coming year, though overreach by the President could change that. But the President’s protectionist leanings are not likely to be discouraged by the newly elected Congress.

An Axios report declares that “Trump is as jazzed as ever about hitting foreign-made cars with steep tariffs. [All] of his senior economic team besides Peter Navarro believes this is a terrible idea. But they haven’t swayed him.” In fact, he is becoming more enamored of the idea and “now views the threat of car tariffs as his best leverage over negotiating partners.” He believes that that threat helped win Canadian concessions and EU agreement to open talks. Axios further reports that Defense Secretary Jim Mattis, who has a role in recommending whether to impose Section 232 tariffs, remains “deeply skeptical” and worried about the impact car tariffs would have on allies. The tariffs don’t appear to be imminent, but the President could decide to impose them at any time. The coming year is sure to bring him many frustrations that could provoke him to do so.

He is also sure to wield the car tariff threat in the Japan and EU talks. It is possible that the Democrats will support the President taking the hardest line in these talks, including demanding that Japan open its markets to US farm products and accept auto rules-of-origin that disadvantage Japanese car and parts makers. These demands would be more aggressive than most of the US business and farming communities are calling for. In his press conference the day after the elections, the President indicated that he intends to be tough with Japan, focusing on the trade deficit and the auto sector.

The Democrats could decide not to cooperate at all with the President on trade in order to deny him any victories, though most of their constituencies basically agree with the President’s protectionist stance. There are, in any event, two basic matters on which just about all Democrats and Republicans agree: that a key objective of trade policy should be to expand foreign market access to boost exports and that China is a bad actor and should pay a price for its abuses. But how these common goals will impact trade policy with the new divided government is not yet clear.

Also unclear is how the President’s trade policy affected the elections. The Republicans had major losses in agricultural states, and some of those almost certainly resulted from the impact of the retaliatory tariffs. However, even in these states, the Democrats did best in urban/suburban areas rather than in farm areas, whereas many Republicans still won seats in heavily agricultural regions.

The metals tariffs appear to have impacted some House, Senate, and governor races where Republicans lost in labor-heavy, industrial and rust-belt areas, though some Republicans also made gains there (e.g., Ohio governor’s race).

The picture is mixed enough that the White House no doubt won’t attribute losses to its trade policy, and it’s not clear if members of Congress will take any lessons from it regarding what they should do on trade policy. For the President, the best bet is that he’ll double down on protectionism in an effort to shore up his base while also appealing to at least some Democrats. It is notable that many Republicans with a history of supporting trade liberalization either lost their midterm contests or retired just before. All this boosts the pro-protectionist orientation of the new Congress.

This is occurring, ironically, at a time when the US population, according to recent polls and surveys, likes trade and favors trade expansion.

Nothing certain as Trump-Xi meeting looms

Chinese President Xi Jinping’s “Made in China 2025” program has been a particular target of the Administration, singled out in the Section 301 report and subsequent actions by Vice President Mike Pence in his hardline speech on China last month. While Beijing has decided that the name “Made in China 2025” is too provocative, it eliminated the name but hasn’t pulled back on the program itself.

The President’s full comment on China, while once again confusing tariffs paid by US importers for “taxes that China is paying for us,” did state that he hopes to make a deal with Xi. He said: “If you know, China has come down tremendously [in “worth”]. Tremendously. China would have superseded us in two years as an economic power; now, they’re not even close. China got rid of their ‘China ’25’ because I found it very insulting. I said that to them. I said, ‘China ’25’ is very insulting, because ‘China ’25’ means, in 2025, they’re going to take over, economically, the world. I said, ‘That’s not happening’. And we’ve gone way up. They’ve gone down. And I don’t want them to go down. We’ll have a good meeting and we’re going to see what we can do. But I have to say this: Billions of dollars will soon be pouring into our Treasury from taxes that China is paying for us…. But we’re going to try and make a deal with China because I want to have great relationships with President Xi, as I do, and also with China.”

Xi at the China Import Expo in Shanghai

For his part, President Xi gave the opening address on November 5th to the first-ever China Import Expo in Shanghai. Expected to be an annual event, the Expo showcases China’s proclaimed drive to increase imports of goods and services.

Xi promised that the encouragement of imports is “not a temporary arrangement but a long-term consideration” that will lead to import growth, including the opening of important service sectors including finance, healthcare, education, telecommunications, and mining. Moreover, he said the establishment of the Hainan free trade zone will be sped up, and Shanghai will be given greater autonomy to experiment with free trade. Xi did not, however, detail any structural reforms or mechanisms that would address the basic complaints of its trading partners. He also used the speech to make clear that he isn’t meeting with Trump to offer concessions in these areas.

Foreigners were underwhelmed. They pointed out that the amount of increased imports Xi promised for coming years isn’t much above the expected rate of growth. Thus, the speech was seen as nothing new, introducing nothing to assuage the gripes of foreign investors and exporters who have become increasingly wary of Xi’s statist/nationalist (almost Maoist) inclinations that have been favoring state-owned enterprises and Party control of the economy.

This is the environment in which Trump will meet Xi. It is not auspicious. There is, further, concern within the US business community that the White House may not be preparing adequately for the meeting. Administration officials have begun to solicit ideas from business leaders regarding what specific issues they should raise, but these leaders report they detect continued disagreement among Trump’s advisers and they haven’t been given any clear indication of what the Administration wants to achieve.

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