The weekly trade report with L.C.
A White House decision to blame China for the COVID-19 pandemic, together with ongoing discussions as to how to punish Beijing economically, have now become public knowledge. Both President Trump and Secretary of State Mike Pompeo now say that the virus likely emerged from a Wuhan bioscience lab. China strongly rejects the allegation, but reports pointing to the Wuhan lab originally came from scientists in China. These reports were quickly taken down by the regime. Notice was then given that no further reports on the origin of COVID-19 were to be made public without Beijing’s approval.
The accusation isn’t that the coronavirus was let loose on purpose but rather that it escaped from a poorly managed lab. US scientists had warned much earlier that the lab in question had safety issues.
It has long been understood that the outbreak began in Wuhan and that China for too long not only refused to warn the world. Worse, it shut down transportation within China while simultaneously allowing infected persons to leave China for abroad. That was a culpable policy of deliberately infecting the rest of the world.
What to do about China
Two controversial measures are under consideration in the White House:
- withdrawing China’s sovereign immunity so that Beijing can be sued for liability, and
- cancelling US debt to China (e.g., reneging on bonds).
Both, especially the second, would have such negative fallout beyond the US-China relationship that they are unlikely to materialize. But if the US were to negotiate a common plan of action with China’s key trade partners who are also US allies, some measures could doubtless be arrived at.
The concerting of multilateral action with allies, however, is a virtue yet to be cultivated by the Trump administration.
The Trumpian silver bullet: tariffs
When asked about the bond-default option on April 30th, President Trump replied “When you play that game, you’re hurting the sanctity… of the greatest currency on Earth.” Yet we can still punish China, he said. “We can do it in other ways. We can do it with tariffs.”
He suggested he could raise $1 trillion in this way, an absurd claim.
Tariffs have a further disadvantage that the president has yet to acknowledge. Tariffs would be a tax on US importers, industrial customers, and the consumer, not China. Raising taxes under present economic conditions would be lunacy.
Compensation or punishment?
It would also be more productive to frame the issue as a matter of compensation rather than punishment.
On May 1st, economic adviser Larry Kudlow was queried as to what to do about China. He too ruled out debt cancellation but declared that the Chinese “are going to be held accountable.”
Like debt cancellation, the prospect of allowing lawsuits against China by lifting sovereign immunity has a downside in that it could open the US and other governments to being sued. But the case against China in the present instance is a very strong one — versus, say, France suing the US for non-adherence to the Paris Climate Accord.
Suing China does have its proponents, including Sen. Tom Cotton (R-AR) and this publication. The State of Missouri has already sued China in federal court.
Developing-sector lawsuits
Lawyers in other countries including Nigeria and Egypt have also brought suit against Beijing in their own courts.
The Financial Times of London notes that “China faces wave of calls for debt relief on ‘Belt and Road’ projects.” In other words, countries in recession due to the virus are suggesting they may withhold payment on BRI-related debt. Beijing has suggested it may grant some relief to these countries. This debt relief, however, would likely be handled by the Chinese in such a way as to tie the “relieved” countries even more closely to Beijing.
Now an election “wedge issue”
A further complication on relations with China is that China relations have now become a “wedge issue” in the 2020 elections, with each of the two major candidates accusing the other of being “soft” on China.
Nevertheless, two “senior Trump administration officials signaled Monday [May 4th] that they won’t seek to punish China economically if Beijing abides by trade commitments made earlier this year,” according to the Wall Street Journal the next day. The officials were identified as Matthew Pottinger, a deputy national security adviser, and Treasury Secretary Steven Mnuchin. The Chinese committed to buy $200 bn. in US exports under the “Phase One” trade agreement concluded between the two countries in January of this year.
Business pressure for tariff relief
Meanwhile, in opposition to President Trump’s preferences, pressures for more tariff relief continue to build in the business community. The 90-day suspension of most-favored nation tariffs announced last week only added to previous calls for broader as well as more targeted removal of tariffs.
The 90-day tariff deferral only applies to goods imported in March and April, and doesn’t apply to the Section 301, 232, or 201 tariffs, anti-dumping and countervailing duties, or the Airbus retaliatory tariffs. But it does signal that the administration admits tariffs cause harm to domestic industries and therefore that the administration, especially in an election year, may be open to more comprehensive relief.
Medical sector still dependent on China
The comments of medical-related companies asking the USTR to lift more Section 301 tariffs are stunning. Companies making critical products from disinfectants to digital thermometers to medical gowns to UV disinfectant lamps are pleading for relief from the high tariffs, arguing that these products are not and will not soon be available from domestic sources. Medical equipment supplier Medline asked for ending the 25% and 7.5% Section 301 tariffs still imposed on a variety of Chinese “products critical to the pandemic response,” as well as for renewing the tariff exclusions that have been granted some of these products.
Other associations and companies in a wide array of sectors beyond healthcare have also requested relief.
US companies short of working capital
Among the calls for tariff relief this week, the Americans for Free Trade coalition of hundreds of companies and associations wrote to the president calling on him to put off all duties set to be collected in May and June. That, they said, “would immediately free up billions of dollars of working capital for American companies,” allowing them to “reopen their doors from a position of strength.” Since the request is for a deferral, not a termination, of the duties owed, it wouldn’t impact government revenues.
The National Foreign Trade Council called for ending tariffs on a wide array of imports.
Meanwhile both Democrats and Republicans are seeking to end US industrial dependence on China as soon as this can be achieved. The poor quality of medical equipment received from China is deepening this “re-shoring” sentiment.
Power grid protection, an import issue
In the meanwhile, President Trump issued an Executive Order on May 1st aimed at protecting the national electric power grid from foreign threats. The risk to the grid has been a long-standing issue, and one possible result of the order could be that more grid components will be made in the US rather than imported from unfriendly countries.
China is the clear target of the order. US imports of its electrical equipment were valued around $10 billion last year — so having to find new suppliers won’t be easy.
Military technology control, an export issue
The Commerce Department’s Bureau of Industry & Security announced on April 27th tightened “restrictions on technology exports to combat Chinese, Russian and Venezuelan military circumvention efforts.” China is clearly the key target of the new export controls.
Sen. Ben Sasse (R-NE) welcomed the changes, telling reporters, “China’s so-called ‘private sector’ is fake…. Chairman Xi has erased any daylight between China’s businesses and the Communist Party’s military…. These rules are long overdue.”
Exporting semiconductors along with sensors and similar technology that have military uses will now require a license even if shipped to users who don’t intend to use them for military purposes.
Some domestic businesses are concerned. The Semiconductor Industry Association said in a statement, “While we understand military-civil fusion trends demand smart and targeted national security responses, we are concerned these broad rules will unnecessarily expand export controls for semiconductors and create further uncertainty for our industry during this time of unprecedented global economic turmoil.”
Some manufacturers may forgo the Chinese (and other) markets because compliance with the new export rules will be quite burdensome.
Amazon makes the “Notorious Markets” list
On April 29th, the USTR released this year’s “Review of Notorious Markets for Counterfeiting and Piracy.”
What grabbed the widest attention in the review was the designation of a US company’s foreign marketplaces as “notorious,” the first time a domestic company has been so-targeted. The company in question is Amazon. Its operations in Canada, France, Germany, India, and the UK are now on the USTR’s “Notorious Markets List.”
Having a company placed on the list does not entail any specific action that the US government will take. The penalty that comes from being on the list is reputational. But companies cited as “Notorious Markets” could find themselves under enhanced scrutiny by their host governments and even possible criminal actions.
Amazon’s rebuttal
Amazon responded with a statement accusing USTR of putting its foreign platforms on the list because President Trump resents Jeff Bezos and holds him responsible for negative coverage in the Washington Post. But the USTR did not put Amazon marketplaces on the list in a vacuum. When USTR solicited public comments in preparation for the Notorious Markets report, the American Apparel & Footwear Association pushed hard to get Amazon cited for carrying knock-offs of major and luxury brand footwear, clothing, and leather goods. These, along with electronics, are the most pirated products. Similarly, the Wall Street Journal ran an in-depth investigative report on Amazon that showed that its vetting of vendors was so lax that it was even hosting vendors who were selling — as “new” — used goods retrieved from dumpsters.
New charges against Amazon
USTR found Amazon’s rebuttal to be wanting. The section on Amazon in the review states that “right holders expressed concern that the seller information displayed by Amazon is often misleading… [One can’t] determine who is selling the goods and that… Amazon does not sufficiently vet sellers on its platforms. They also commented that Amazon’s counterfeit removal processes can be lengthy and burdensome, even for right holders that enroll in Amazon’s brand protection programs.” One USTR source suggested that Amazon itself, that is, the US-based parent company, could wind up on the Notorious Markets List in a future review if it doesn’t tighten its practices.
Bezos is separately embroiled in a controversy over whether Amazon, contrary to promises, has used data gleaned from successful sellers on its platform to develop competing products that would push them aside. This was also documented in a Wall Street Journal exposé and has now caught Congressional attention.
Amazon runs the risk of standing in line as a lawsuit defendant right next to China.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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