Trade correspondent L.C. reports:
President Trump has liberated the US from President Obama’s regulatory damage to the economy only to replace it with his own no less harmful trade damage. Over a year ago, Founders Broadsheet warned that the administration’s tactics would harm the US, and our concerns are now unfortunately coming to be validated. A front page article in today’s Wall Street Journal reports that
Spending on factories, equipment and other capital goods slowed in the first quarter among a broad cross-section of large, U.S.-listed firms, bolstering investor concerns that a key driver of economic growth is fading….Executives at several companies said lingering trade tensions with China were making them and their customers cautious, raising the prospect that slower business spending could hamper economic growth later in 2019 and in 2020….
Broad trends in capital spending are closely watched by many analysts and investors, who view longer-term investments by large corporations as among the most robust sources of future economic growth. They contend this spending tends to spur further investment by partner firms and suppliers, and over time to lift worker productivity and overall economic output.
That is a process that many view as the key to extending the nearly 10-year old U.S. economic expansion at a time when trade dynamics are unsettled, global growth is softening and the effect of 2017’s federal tax cuts is fading.
“Any time there’s trade tensions of this kind, it does put a certain amount of conservatism, I think, into all of our plans for capital spending,” Caterpillar Inc. Chief Executive Jim Umpleby said…
The damage is about to worsen, contrary to appearances and initial press reports. There is one welcome development, however. The Trump administration on May 17th declared that it had reached a deal with Canada and Mexico to lift the tariffs it placed on imports of steel (25%) and aluminum (10%). In return, Canada and Mexico agreed to lift their retaliatory tariffs. The deal removes an important obstacle to Congress’s passing of the US-Mexico-Canada trade agreement (USMCA), though other issues remain to be resolved.
The May 17th deal only affects the US’s NAFTA partners. The metals tariffs remain in effect for all other foreign suppliers that haven’t reached a separate quota or other arrangement with the US. That, however, makes the dropping of the tariffs especially beneficial for Canada and Mexico since they will be the only metals suppliers to the US market not under some sort of tariff or quota – other than Australia.
There are reports that a key push to end the tariffs came from Vice President Mike Pence. Having just toured Midwestern states to promote the USMCA, he returned with an understanding that the tariffs had to end to boost support from agricultural areas. US Trade Representative Robert Lighthizer reportedly also was eager to end the tariffs so that he could turn his full attention to the China clash. According to Canadian officials, another key player was Senate Finance Committee Chairman Chuck Grassley (R-IA), whose strong, public insistence that the tariffs had to end pushed the White House to act. Canadian Foreign Minister Chrystia Freeland thanked him publicly for that effort.
The White House may also have felt that it had to reward Canada – and stop treating it as a “national security threat” – because of its strong support for Washington’s position in the Huawei/Meng Wanzhou case, keeping the Huawei official under house arrest despite strong Chinese penalties, including “retaliatory” imprisonment of Canadian citizens and new restrictions on Canadian products.
The bad news
President Trump also proclaimed on May 17th that he is delaying for 180 days his decision on whether to restrict automotive imports on national security grounds. This is a potent threat aimed especially at Japan and the European Union (EU).
The Commerce Department report that is supposed to provide a justification for restricting automotive imports has still not been released publicly – contrary to legal requirements. Senate Finance Committee Chairman Chuck Grassley has requested it for months, and there is a Freedom of Information Act request that Commerce has delayed responding to. That has led most observers to assume that the evidence and arguments that Commerce has concocted to justify automotive imports as a national security threat are flimsy.
Though much of the US press is portraying the 180-day automotive tariff delay as showing a desire by the White House to ease trade tensions with Tokyo and Brussels while it focuses on China, the delay was not a retreat from confrontation but a tactical move to use the continuing threat of automotive tariffs to force Japan and the EU into trade deals they are currently rejecting.
The Administration clearly wants Japan and the EU to agree to some form of cap on auto exports to the US, roughly modeled on the automotive side letters with Canada and Mexico. For German cars especially but also Japanese cars, the President wants to see more meaningful export limits, ones that would actually cause a contraction in US auto imports.
Tokyo and Brussels have both already rejected such an approach, not only for reasons of economics and fairness but because it would be WTO illegal, flouting global trade rules, and set a bad precedent for other trading nations. The Uruguay Round Agreement that established the WTO explicitly forbids any form of voluntary export restraint.
EU Trade Commissioner Cecilia Malmstrom released a statement saying that Brussels will engage in talks for an industrial goods trade deal that could include cars “but not WTO-illegal managed trade.” She warned earlier that the EU is preparing a retaliation list should the auto tariffs take effect. The list would target about $22.5 billion in US exports.
Tokyo will be under extreme pressure to reach a deal over the next six months. It cannot afford to have a severe cut in automotive exports to the US. The President’s demand that Japan cut its trade surplus with the US will ironically force Tokyo to become more reliant on exports to China and to care more about China’s economic vitality – not the position the Administration says it wants to put its allies in.
Trump against foreign investment in the US
No less worrisome is the fact that the presidential proclamation not only portrays imports from Japan and the EU as a security threat. It also targets US-based manufacturing facilities of foreign-brand automakers. That is a major new development — meaning that foreign investment in the US auto sector – which President Trump had previously been encouraging – is now being portrayed by him as a national security threat along with imports. As the proclamation states, “American-owned automotive R&D and manufacturing are vital to national security” – and are threatened by foreign-owned R&D and manufacturing even if taking place within the US, with US workers.
Auto — a US “national champion industry”?!
This is especially foolish given the fact that Japanese foreign direct investment has long been lauded for its high R&D component – above the average for domestic investments.
Ironically, what the White House is demanding is that it be allowed to choose a national champion industry and protect it against foreign competitors so that it can develop its advanced technology indigenously — on the grounds that this is necessary for national security. The Administration wants to engage in an industrial policy of just the sort that it denounces China for.
The administration is not getting much support for this effort. Already, the prospect of imposing Section 232 automotive tariffs has provoked an almost entirely negative response from the auto industry, the rest of the private sector, and legislators of both parties. Now politicians representing states with major foreign auto investments will have even more motivation to oppose the President and even find grounds, however spurious, to support the President’s impeachment, as Michigan Republican Congressman Justin Amash just did.
The Chamber of Commerce calls the proposed auto restrictions “a misuse of the administration’s trade authorities” that “only creates more uncertainty weakening our economy.” Toyota has responded no less sharply:
“Toyota has been deeply ingrained in the US for over 60 years…. [We] have invested over $60 billion in this country…. Today’s proclamation sends a message to Toyota that our investments are not welcomed, and the contributions from each of our employees across America are not valued…. Our operations and employees contribute significantly to the American way of life, the US economy and are not a national security threat.”
It remains to be seen if the President Trump’s new approach has a chilling effect on foreign investment in the US even beyond the auto sector.
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