Trade correspondent L.C.‘s weekly report:
On October 2nd the US received official World Trade Organization authorization to impose almost $7.5 billion annually in retaliation against the European Union for its WTO-illegal subsidies to Airbus. This had been expected, though the amount was on the lower side of what had been anticipated. It was, nonetheless, by far the largest award ever authorized in a WTO case.
The EU, however, has a pending case against the US for its subsidies to Boeing. Accordingly, a huge ratchet-up in trans-Atlantic trade confrontation is possible – though there are some off-ramps by which a full-blown trade war could be avoided. The two sides are expected to meet on October 14th. The tariffs are scheduled to take effect on October 18th.
While the forthcoming tariffs are large and discretionary, they are different in character from the Sections 201, 301, and 232 tariffs that President Trump imposed unilaterally. Thus, they are less threatening to the global trading system and rule-of-law than his earlier measures were. Although the US could impose 100% tariffs on EU exports worth up $7.5 billion, it chose to impose lower tariffs that will result in an amount less than that authorized. The four countries that comprise the Airbus consortium – the UK, France, Germany, and Spain – say they are ending the offending subsidies. The EU has also held off on immediate retaliation — likely fearing that this would provoke President Trump into imposing auto tariffs on the EU.
Further in the future is the announcement of the arbitrator’s award in the parallel case in which the EU successfully challenged US subsidies to Boeing. That’s expected next spring. However, a defender of the US / Boeing case against the EU makes a strong argument that any claim of equivalence in the two cases is false and that the EU has been far and away the greater violator of trade rules.
EU Trade Commissioner Cecilia Malmström reiterated this week that the EU has sought to engage the US in talks and presented a concrete proposal back in July for ending the dispute, but “We have not received a positive response.” It thus appears that Washington wants the tariffs to take effect, but whether it intends for them to be long-lasting or to be used as leverage for some sort of deal isn’t clear. In Lighthizer’s statement announcing the tariffs he said, “We expect to enter into negotiations with the EU aimed at resolving this issue in a way that will benefit American workers.”
Also of concern to the EU and the US automotive industry is the president’s decision due next month on whether to impose Section 232 tariffs on the automotive trade. This would hit Germany especially hard at a time when its economy is verging on recession.
China only wants a limited trade deal
The US and China will hold their 13th round of trade talks in Washington, October 10th-11th. As usual, Vice Premier Liu He will lead the Chinese delegation, meeting with Lighthizer and Treasury Secretary Steven Mnuchin. Few observers say they expect much from these talks. Some analysts believe that Beijing has decided it should weather the US tariff storm rather than make concessions and show softness, especially with a US election coming up. According to an October 7th article in Bloomberg, an anti-Trump business publication,
Vice Premier Liu He [will] bring an offer to Washington that won’t include commitments on reforming Chinese industrial policy or the government subsidies that have been the target of longstanding U.S. complaints. That offer would take one of the Trump administration’s core demands off the table. It’s emblematic of what analysts see as China’s strengthening hand as the Trump administration faces an impeachment crisis — which has recently drawn in China — and a slowing economy blamed by businesses on the disruption caused by the president’s trade wars.
Perhaps as a sweetener to China’s downsized willingness to bargain, the Oct. 7th Wall Street Journal reports that
The long-frozen U.S.-China trade talks are showing signs of a possible thaw, as a Chinese trade team returns to Washington and Chinese commodity buyers return to America’s soybean market.
Farm exports, new purchasing deals and prices have all been climbing again in recent weeks. Reports from the Commerce and Agriculture departments last week showed China making some of its largest purchases in over a year.
US-India trade update
Commerce Secretary Wilbur Ross was in India this week for the India Economic Summit, where he met with government officials including Commerce Minister Piyush Goyal. Ross is attempting to move forward the negotiations for a US-India trade deal – negotiations that unexpectedly faltered last week when President Trump and Prime Minister Narendra Modi were unable to announce an agreement. Both sides continue to express optimism that a narrow, limited deal will be reached soon. The main sticking points are well-known: Indian price controls on medical devices, Indian tariffs and restrictions on an array of agricultural (especially dairy) and industrial products (especially innovative circuit technologies), Indian e-commerce regulations, and, from the other side, US withdrawal of India’s GSP benefits, its continued Section 232 tariffs on Indian metal, and the lack of full access for Indian generic drugs. There are many other trade issues in dispute between the two sides, but these are the ones that are on the table in the current talks.
The outcome is expected to be modest, both in terms of areas covered and monetary significance, but both leaders would like to have a victory to claim.
Meanwhile, the US has reportedly won a WTO case it filed against India for an array of export subsidy programs that Washington claims violate the WTO Agreement on Subsidies & Countervailing Measures. This was the very first complaint filed by the Trump Administration with the WTO.
WTO sounds alarm on global trade
The WTO released on October 1st its latest semi-annual forecast for world trade growth. It was a downer – in fact, the projection for global merchandise trade growth (by volume) for this year was down by half, to 1.2%, from April’s 2.6% projection. According to the WTO, “Trade conflicts pose the biggest downside risk to the forecast, but macroeconomic shocks and financial volatility are also potential triggers for a steeper downturn.” WTO head Azevedo’s accompanying statement was similarly dire: “The darkening outlook for trade is discouraging but not unexpected. Beyond their direct effects, trade conflicts heighten uncertainty… leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards. Job creation may also be hampered as firms employ fewer workers to produce goods and services for export.”
The WTO trimmed its 2020 forecast to 2.7%, higher than this year but it cautions “that downside risks remain high and that the 2020 projection depends on a return to more normal trade relations.” This analysis is in line with what other institutions – IMF, Fed, private consulting firms – have been saying for a while about the broad impact of the trade war. Azevedo’s admonition that the ramifications of the blows and uncertainty from the trade war are amplified through the impact on business investment/productivity seems to be born out in the alarming drop in the US manufacturing sector.
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