L.C.’s weekly trade report follows:
Tariff trigger pulled; some damage to global markets and investments appears
US Trade Representative Robert Lighthizer
Following the failure of bilateral talks the Trump administration has followed through, as expected, by imposing 25% tariffs on about $50 billion worth of Chinese exports. That represents about 10% of the annual value of US goods imports from China. The simultaneous US trade assault on allies as well has begun to noticeably set back global markets. A strong dollar and the linked rise in oil prices are meanwhile threatening debt problems in some important developing countries.
The reason US Trade Representative (USTR) Lighthizer stated in announcing the administration’s most aggressive trade policy step yet: “China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025′.”
The new tariffs are being taken under US trade law Section 301. The White House also said that by June 30th it will announce steps it may take to restrict Chinese investment in the US as punishment for Chinese trade abuses.
Still, the Administration is holding out the hope that an agreement might be reached.
China immediately called the US move “damaging to the two countries’ bilateral interests” and “undermining the world trade order.” It released its list of $50 billion in US exports to be hit with tariffs.
The two sides have about three weeks to reach a negotiated solution, but more escalation is possible. President Trump warned China not to retaliate, but it plans to anyway. The US subsequent response could be a decision to slap tariffs on another $100 billion in Chinese exports — something Trump asked the USTR to prepare for in April.
Pushback against the President’s trade approach
US business interests led by agriculture, the retail sector, and parts of the electronics industry immediately intensified their lobbying against the tariffs. The Retail Industry Leaders Association called the US tariffs “a reckless escalation of the global trade war.” Farm groups were especially upset because in very recent talks, Beijing was prepared to offer significant increases in purchase of US agricultural and energy products. Now agricultural exports will be among the main ones hit by new Chinese tariffs. Energy, a Trump-favored sector, is in a similar situation. Rather than having China purchase more US coal, oil, LNG, and other petroleum products, those products may be subjected to tariffs that sharply diminish their sales.
The new tariffs on China received a better reception from some politicians in both parties than did the Section 232 steel and aluminum tariffs, which mainly affected allies. The administration move was supported both by Senate Minority Leader Chuck Schumer (D-NY) and Sen. Marco Rubio (R-FL). Both indicated they favor a tough line with China, but they oppose putting penalties on allies.
Ways & Means Committee Chairman Kevin Brady (R-TX) was less pleased. He released a statement saying, “we need to hit our target, which is China and its deceptive and harmful trading practices. But I am concerned that these new tariffs will instead hurt American manufacturers, farmers, workers, and consumers….These tariffs make it more difficult to sell more ‘Made in America’ products globally and expose many of our industries – particularly agriculture and chemicals – to devastating retaliation. I urge USTR to narrow these tariffs…”
US tariffs on Canadian lumber are putting new houses out of range for many would-be buyers
On June 14th, 171 members of the House from both parties sent a letter to Lighthizer and Commerce Secretary Wilbur Ross urging them to conclude a NAFTA overhaul that includes a resolution of the softwood lumber dispute. That long-standing dispute has led to heavy antidumping and countervailing duties on imports of Canadian lumber averaging about 21%. This is damaging the US housing industry. Canada, however, has been resisting US pressure to lower its prohibitive tariffs on US dairy exports, despite the fact that Canadian consumers detest the high prices they must pay for protected Canadian dairy products.
While there is great concern in Congress over the direction of the President’s trade policy, Republicans remain worried about their electoral prospects if they cross the President. They thus have not acted to restrain him. Fear of losing the Trump base of the Republican Party and therefore losing an election is most acute now, during primary season, when Republicans are facing challengers who accuse them of not being sufficiently supportive of the President. Republicans may be more willing to oppose him once the campaign for the general election begins and they are facing anti-Trump Democrats, many of whom are already denouncing the 232 tariffs. This dynamic was a key reason for the failure this week of Sen. Corker’s bill to give Congress a veto over the President’s imposition of Section 232 tariffs. The President pressured legislators not to be disloyal to him by supporting the bill.
Many critics of the 301 tariffs argue that they won’t crimp China’s development of advanced technology but will instead give it a further incentive to produce the embargoed tech products domestically. Most critics in the West agree that China has used unfair methods to grab foreign technology and move up the value chain but don’t believe that unilateral action can be effective. They instead have called for international efforts spearheaded by the US, Japan, and the EU to go after China’s practices at the WTO and other international forums.
Retaliation also threatened by allies
In the wake of the June 1st imposition of Section 232 tariffs on steel and aluminum from Canada, Mexico, and the EU, the Canadian government announced that it is drawing up its retaliation list and is taking public comments through June 15th. It will put additional duties of 10% and 25% on various US exports effective July 1st and is in the process of determining which products to hit. The US Chamber of Commerce notes that combined retaliation for the 232 tariffs and China’s retaliation for the 301 tariffs means that about $75 billion in US exports will face retaliatory tariffs in the first week of July unless Ottawa and Washington work something out in the next two weeks.
Mexico also has its retaliation list for the steel and aluminum tariffs. It is imposing 25% duties on steel and varying duties on farm products. Mexico’s retaliatory tariffs take effect July 5th. The retaliation would hit billions of dollars in US exports of corn and soybeans. This would hurt Mexican livestock producers but be a bigger blow to US farmers. US pork exports would be hit with a 20% tariff. The beneficiaries will be Latin American countries and the EU, with which Mexico just upgraded its free trade agreement (FTA) so that many European agricultural products now enter duty-free.
The EU will also impose its retaliation list of 25% tariffs in July if the US tariffs aren’t lifted soon. It has announced a second list that will face tariffs as high as 50% if the WTO rules the US tariffs illegal. Japan has notified the WTO that it reserves the right to retaliate but has not released a list of targets. India and some other countries have notified the WTO that they are preparing their retaliation lists.
Self-defense through expanded free trade agreements
The EU is continuing its efforts to forge new FTAs. Trade Commissioner Cecilia Malmstrom left late this week to launch talks for an EU-Australia FTA and an EU-New Zealand FTA. But the new populist Italian government may not support the EU-Canada Comprehensive Economic & Trade Agreement (CETA). Italy has the most Geographical Indications claims of all EU countries, and Canada has agreed to recognize only some of them. (Geographical Indications provide trademark-like protection for geographical names on food products, e.g., asiago cheese, Barolo, and Asti spumante.)
Meanwhile, in the Pacific, other countries have also expressed interest in joining the Trans-Pacific Partnership (TPP-11) that President Trump pulled the US out of. These potential members include Colombia, South Korea, Indonesia, Thailand, Taiwan, and the UK.
Click here to go to the previous Founders Broadsheet post (“As G7 ends, President Trump opposes allies rather than concerting measures against China”)
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