TRADE IS A TWO WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR — JUNE 30, 2018
Have had a difficult time writing this blog post because Trump’s trade policy has been so difficult to figure out. Watching all these trade actions is like watching a pinball machine.
This first article will be an overview setting certain principles to keep in mind when analyzing Trump’s trade policy. This article will then be followed by a series of articles on each specific trade action.
This overview article, however, will concentrate on answering some questions. First, is there a method to Trump’s trade madness? (Shakespeare Quote Hamlet) What are the principles driving Trump’s trade policy? What is President Trump’s problem with the WTO? Will President Trump lose the midterms because of his trade policy and the collateral damage on downstream steel and aluminum users and the retaliation impact on US agriculture industry?
There are so many major trade actions going on, all creating real winners and true losers in the US economy that it is difficult to see a pattern. This many trade actions also stretch the resources of the US government. USTR Lighthizer is involved in intense NAFTA negotiations with Canada and Mexico, which are complicated by the demands of agriculture, but also negotiations with China and numerous other countries. President Trump does not pick his battles, but apparently risks trade attacks against every country and the resulting retaliation.
Finally, although not a fan of Trump, on June 28, 2018, Julian Zelizer, a CNN political analyst, stated that Democrats have “badly underestimated Trump”:
While Congress and the courts have signiﬁcant power when it comes to checking legislative initiatives from the Oval Office, a president who is intent on dismantling policies — such as stripping away regulations or withdrawing from international agreements — can get a lot done if he or she is determined. . . .
The possibility for President Trump to seriously transform American policy keeps growing and the potential for a two-term presidency can no longer be dismissed.
Trump’s impact on trade policy cannot be underestimated.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address [email protected].
MYRIAD US TRADE ATTACKS, RETALIATION BY TRADE PARTNERS AGAINST US EXPORTS, G-7 DEBACLE AND THE TRADE ATTACKS ON CHINA—IS THERE A METHOD TO PRESIDENT TRUMP’S TRADE MADNESSS?
SEVERAL POINTS TO CONSIDER
STRONG ECONOMY AND TRADE DEFICIT
To understand Trump’s trade policy, one should start with several simple facts. First, the US economy is roaring with the lowest unemployment rate in decades and the lowest Black and Hispanic unemployment rates in history.
Second, in 2017 the US Trade Deficit in goods with the World was $810 billion, almost a trillion dollars. The US trade deficit in goods with China in 2017 was $375 billion, EC $151 billion, Mexico $70 billion and Canada $17 billion.
Trump firmly believes that the US cannot follow the same trade path because the US simply cannot afford it. Recently, President Trump stated that the United States will no longer do stupid trade, but smart trade and in trade the US will no longer be the world’s piggy bank.
One of Trump’s key promises in the election was that he would fix the trade problem. That is why President Trump tore up the Trans Pacific Partnership and announced the renegotiation of NAFTA. President Trump keeps his campaign promises.
Trump also probably believes that the US economy is strong enough so that he can risk tough trade talks and even a trade war if necessary. But can the US economy withstand a world trade war on so many different fronts?
SO MANY TRADE ACTIONS
In spring it looked like Trump would negotiate separate trade deals with Mexico, Canada and EU to stop retaliation in the Section 232 Steel and Aluminum cases. In June, the risk of a global trade war increases with the breakdown in negotiations and actual tariffs and retaliation against US exports in the Section 232 cases, the threat of tariffs on $50 billion to $250 billion on Chinese imports in the Section 301 Intellectual Property case, NAFTA negotiations??, ZTE Mess, and the breakdown on trade in the G-7 talks in Canada. EC, Canada, Mexico, China, India and numerous other countries have implemented retaliation lists against US exports because of the Section 232 tariffs.
Trump also is about to release another attack with a Section 232 case on automobiles, even though all the US automobile companies oppose the case.
Trump is demanding fair and reciprocal trade, not stupid trade. See June 20, 2018 Trump speech in Minnesota at https://www.youtube.com/watch?v=Ao4SdNUG4X8.
THE SPEED OF TRUMP AND THE OBAMA LESSON
But there are several other issues at work here. Sebastian Gorka, formerly with the Trump White House and a Fox News commentator, often talks about “the speed of Trump”.
Some back history here. Rahm Emanuel, President Obama’s former Chief of Staff, made a point that a crisis should not be wasted stating, “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”
But if one looks back on the Obama Presidency, many crises were let go to waste. In the first two years of his Presidency, Obama had a majority in the House of Representatives and a filibuster proof 60 Democratic majority in the Senate. But very few new legislative bills were enacted into law.
During that first two years, Democratic Senators and Congressmen warned President Obama that he had to do something to increase jobs. But Obama decided to concentrate on healthcare for all.
Then before the first midterms, Obama lost the Ted Kennedy Senator seat to Republican Scott Brown, who promised to stop the push for Obamacare. Because the Republicans now had 41 Senators, if the Republicans stayed strong, Obamacare could not be passed in Congress as regular legislation. Then in the first midterms in November 2009 President Obama lost the House of Representatives, which went Republican.
So, President Obama and the Democrats in the Senate pushed through Obamacare on Christmas Eve, December 24, 2009, late at night using the reconciliation process, which required only 51 votes. This was important because once the new Congressional term were to begin in 2010 the Democrats no longer had a majority in the House of Representatives.
Although President Obama won reelection in 2012, in the second midterms in 2014, Obama lost the Senate. Now facing a Republican House and Senate, President Obama was forced to rely on a pen and phone to move his policy through.
But since Obama relied on a pen and a phone, the next President Trump could undo the vast majority of Obama’s policies with his own pen and phone. That is just what President Trump has done. Regulations have been cut enormously in the Trump Administration. President Obama’s legacy is in tatters, in part, because President Obama did not use his time wisely.
In effect, the Obama record was a teachable moment for Donald Trump. Trump knows that he may only have 2 years with a House and Senate majority so he has to move swiftly to do deals and make change. Trump has moved swiftly to undo Obama’s policies and legislate his own policy.
That may be the reason Trump is risking a trade war with the World. Trump is hoping that in the first midterms he can do better than President Obama and hold the House and gain seats in the Senate, but that is a hope and not a sure thing.
In his book Art of the Deal, Trump stated that if you are going to do anything, do it big, which brings us to several more points.
TRUMP FEARS NOTHING AND LIKES CHAOS
The Washington Post recently published an op-ed entitled, “You can smell Trump’s fear”, but that commentator has completely misread Donald Trump. On June 19th, despite the constant drumbeat of attacks of separating children at the border, attacks on trade, and numerous other issues, Trump was cool and calm at a speech to the National Federation of Independent Businesses. See https://youtu.be/ZiSnXNfbQ7k.
Am reminded about the famous statement of a Union soldier who watched General Ulysses Grant at the Battle of the Wilderness writing orders with shells exploding all around him: “Ulysses don’t scare worth a damn!” Donald Trump does not scare worth a damn.
Trump also likes chaos and he creates the chaos by often taking a new look at established positions. He reframes and resets issues, starts discussions from an entirely new point of view.
Substantial change to Federal policy, however, means that many oxen will be gored, the status quo will be changed, and entrenched interests do not like change. Trump, however, apparently likes to ride the back of the chaos tiger.
On June 10, 2018, Jim Hanson, President of Security Studies Group, in an article on Fox News entitled “Trump’s willingness to walk away at the G7 and North Korea summits shows his foreign policy is working,” stated:
“This brings us to the biggest wild card President Trump brings to the world stage: he is a change agent. It would even be fair to say he creates chaos and misdirection – and then looks for an advantage. This drives many of his critics to distraction.
But when you are dealing with longstanding problems and well-entrenched interests, metaphorically knocking over a few apple carts or a conference table or two can break that deadlock. . . .
Peace through strength and fair trade are an excellent one-two punch and they work well together. . . . The Trump administration has a plan and it is working successfully around the world.”
Although Trump is not afraid, he is concerned, and his one concern right now is the impact of his own trade policy on his base, including manufacturing and agriculture.
THE WTO PROBLEM—THE MFN PRINCIPLE BLOCKS RECIPROCITY
Recently it was reported that Trump has stated privately that he wants to withdraw from the World Trade Organization (“WTO”). Trump cannot do this, however, without Congressional approval.
Trump has also made clear that he wants his trade policy to be reciprocal. In other words, US tariff rates should mirror the tariff rates of other countries. But there is a problem with that position—The WTO and its bedrock Most Favored Nation principle.
Once a country, such as China, becomes an “MFN” country, the United States cannot treat China “less advantageously than any other country with MFN status”.
This MFN principle puts low tariff countries, such as the US, at a major disadvantage in trade negotiations. If China has a tariff of 30% on car imports, the US cannot raise its tariff on China car imports to 30%, because its car tariff for the rest of the World is 2%. Since China is an MFN country, Trump must charge China the same tariff as it has with other countries.
One exception to the MFN principle is Free Trade Agreements (“FTA”), but if a country, such as the United States, already has low tariffs to encourage free trade, it is at a major disadvantage because it must reduce tariffs further or make some other concession in a FTA to get tariff reductions from other countries.
The MFN principle, however, is why President Trump has looked for other ways to raise tariffs on specific countries, such as the Section 232 National Security cases and the Section 301 intellectual property case against China.
AMERICANS ARE COMING AROUND TO TRUMP’S ECONOMIC TRADE NATIONALISM
Because of the enormous trade deficit in goods, Trump has succeeded in persuading many Americans that the US weakness on trade has put the US at an unfair trade disadvantage.
On June 11th, it was reported that a Quinnipiac University Poll found that a majority of swing voters, 55 percent, support tariffs on Chinese imports. 80 percent of Republican voters support Trump’s trade actions to date.
Because of Trump, the average American is learning about the many trade barriers to US exports. Trump’s call is for reciprocity.
Why should Canadians put tariffs of over 275% on US dairy products?
Why should British Columbia put up what amounts to an 80% tariff, the highest tariff in the World, on US wine to protect large British Columbia wine producers? Both the dairy and wine problems make President Trump’s point that NAFTA is not a FTA, but a FFTA, a Fake Free Trade Agreement.
Why should Europe have higher tariffs on US cars of more than 10% when US tariffs are only 2%?
Why should China get away with charging much higher tariffs on US exports and have policies to force US companies to give up their technology?
All of these issues are causing public opinion in the US to turn away from free trade. Many American voters, American free trade periodicals, Republican and Democratic politicians are coming around to Trump’ tough trade position.
At the G-7 talks in early June, President Trump stared down Chancellor Merkel and others on trade and slammed Prime Minister Trudeau for his criticism of the US after Trump left the talks. See photo at https://www.theguardian.com/world/2018/jun/10/angela-merkel-photo-donald-trump-diplomacy. The photograph of the Merkel Trump stare down speaks volumes.
After the breakdown of the G-7 talks on trade, Trump sent out a tweet stating:
“Fair trade is now to be called fool trade if it is not reciprocal. Not fair to the people of America! $800 billion trade deficit. Why should I, as president of the United State, allow countries to continue to make massive trade surpluses, as they have for decades, while our farmers, workers & taxpayers have such a big and unfair price to pay?”
During the G-7 talks, Trump stated to reporters that the US would no longer accept “ridiculous and unacceptable” tariffs imposed by other countries on US exports and threatened to “stop trading” with nations that would not lower their tariffs.
Trump further stated: “We’re like the piggy bank that everybody’s robbing – and that ends,”
In a speech on June 25th in South Carolina, Trump described the G-7 dust up with Canada in detail. See speech on youtube at https://www.youtube.com/watch?v=eyf8Uie16tE.
On June 12, 2018, Investors Business Daily, a free trade periodical, which has opposed Trump on trade, stated in an editorial entitled “G-7 President Trump Didn’t Sign G7’s Leftist Agenda – Smart Move”:
“President Trump created a quite a stir among the other Western leaders by refusing to sign the “communique” that capped the G7 summit. But he was right to do so. . . .That’s particularly true of trade.
The summit communique, for instance, exhorts G7 members to “reduce tariff barriers, non-tariff barriers and subsidies.”
A reasonable goal, most economists would agree. The G7 leaders get angry at Trump because he believes that current trade deals, while good on some levels, actually are unfair to the U.S. . . .
But what did Trump say at his press conference as he left the fruitless G7 confab . . . .?
“You want a tariff-free (trade system), you want no barriers, and you want no subsidies because you have some cases where countries are subsidizing industries, and that’s not fair,” Trump said, elaborating his own ideas about trade . . . . “So you go tariff-free, you go barrier-free, you go subsidy-free.”
Sounds pretty free trade to us. The fact that he questions current trade deals doesn’t signal a hatred of free trade. It does show a disdain for deals that pretend to be free trade but are really government managed trade. Often to the U.S.’ detriment. . . .”
WILL TRUMP LOSE THE MIDTERMS BECAUSE OF HIS TRADE POLICY?
On November 6, 2018, voters in the midterms will vote based on many issues, including immigration, taxes or simply firmly held beliefs of never Trump or pro-Trump. But in contrast to many past elections, trade policy will be an important because of the impact on Trump’s base. Trade and the collateral damage caused by the Trump trade policy could be the fly in the ointment of Trump ‘s desire to hold the Republican Congress.
President Trump on June 28th spoke at the opening of the new FoxConn Plant in Wisconsin, in part, because of his concern about the impact of trade retaliation on Wisconsin farmers. See https://www.youtube.com/watch?v=HhihQ52gyc8.
COLLATERAL DAMAGE—STEEL ALUMINUM USERS AND FARM BELT
In March 2018, President Trump and the Commerce Department in the Section 232 cases levied 25% tariff on Steel imports and 10% tariff on Aluminum imports. Originally the EC, Canada and Mexico were to be exempted from the tariffs if trade deals were negotiated with the US. No trade deals were negotiated.
On May 1st, President Trump imposed the tariffs against the three countries and predictably all three countries retaliated by levying billions in dollars in tariffs on US exports. The tariffs and counter tariffs will be described in an upcoming article. In the Section 232 cases alone, 10,000 exclusion requests have been filed by US steel and aluminum users, and the Commerce Department has only addressed a hundred from 18 different companies.
The retaliation by trade partners, including Canada, EC, Japan, India, Mexico and China, is already taking its toll on US farmers. In contrast to the rest of the US economy, farm incomes are down.
STEEL AND ALUMINUM USERS
Downstream steel/aluminum users are now being deeply hurt by the Section 232 tariffs. Many users have to compete in the downstream export markets, and they cannot compete if US prices for the steel and aluminum inputs are significantly higher than world market prices.
One indicator of the injury to the downstream industries is the many trade cases filed in the last year by injured US industries against downstream steel products including: Steel Propane Cylinders, Steel Racks, Stainless Steel Flanges, Forged Steel Fittings, Certain Steel Wheels, Certain Tool Chests and Cabinets, Carbon Steel Flanges, and Certain Carbon Closing Staples.
The Section 232 tariffs are forcing companies, such as Harley Davidson, the well-known motorcycle producer, to move some of its production offshore, and threatens the very existence of the largest US steel nail producer, Mid-Continent Nail, because it is a downstream steel user.
AUTOMOBILES 232 CASE
In contrast to Section 232 Steel case which the US Steel Industry supported, the US automobile industry opposes the Section 232 on automobiles. On June 29th, General Motors filed comments, General_Motors 232 Autos Comments, and state in part:
“increased import tariffs could lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less—not more—U.S. jobs. . . .
Combined with the other trade actions currently being pursued by the U.S. Government—namely the 232 Steel and Aluminum tariffs and the Section 301 tariffs against Chinese imports—the threat of additional tariffs on automobile imports could be detrimental to our company . . . .”
What used to be good for General Motors was good for the US economy. But now President Trump and Secretary Ross think they know better.
Trade is not a Republican or a Democratic issue. It is a regional issue. As part of his base, Trump has the manufacturing states of Michigan, Ohio, Pennsylvania and Wisconsin, the Rust Belt, which has been badly injured by imports from China and other countries. The Rust Belt does not want more trade agreements. The Blue Collar working class in the Rust Belt were a major reason Trump won the Presidency.
But Trump’s other constituency is the rural agriculture states, including Kansas, Iowa, Wyoming, Montana, North Dakota and South Dakota to name a few, all of which are dependent on exports. In contrast to other parts of the US economy, farm incomes are falling and have not increased in 15 years. On June 26th CBS New Money Watch reported that according to the CDC, farmers are committing suicide in “staggering numbers”, a higher rate than other occupational groups.
IOWA IS HOLDING OUT FOR TRUMP
Iowa is ground zero for the farm vote. On June 25, 2018, in an article entitled “’We’re riding a tiger’: The Iowa GOP bets it all on Trump– The president’s trade war could cripple the state, but Republicans trust in him as negotiator- in-chief” Politico reported:
“Donald Trump’s trade war with China could cost Iowa farmers hundreds of millions of dollars and do untold damage to the state economy.
But you’d never know it from talking to Republicans at the recent state GOP convention here. When Iowa Republican Party Chairman Jeff Kaufmann asked more than 1,100 delegates a defining question — who was still behind President Donald Trump? — there was no hesitation. In an exuberant display of unity, more than 1,100 delegates sprang to their feet, whistling, cheering and offering prolonged applause. . . .
The Republicans’ patience with their president amid an escalating trade war is as remarkable as it is politically perilous in an agricultural swing state that has historically held a deep disdain for trade meddling.
On June 15, Trump announced 25 percent tariffs on $50 billion in Chinese goods and China promised to exact retaliatory tariffs, including on a key Iowa export: soybeans. . . .
With nearly $2 billion in soybean exports to China, [Iowa] has the largest exposure to the tariffs of any state in the nation . . .
GOP leaders are convinced Trump will deliver a better deal for Iowa in the end . . . .
None of it guarantees Trump will be able to replicate his 2016 victory here. A White House policy that’s viewed as hostile to farmers could precipitate a backlash from the dozens of rural counties that swung for Trump in 2016 after previously backing Barack Obama. Those are the kinds of counties Trump needs to win states like Iowa and Wisconsin in 2020. . . . .
Even the most loyal of Republicans acknowledged that volatility surrounding trade issues could scramble the state’s political equation.
“As of right now, I’d say we’re supportive of him trying to make free trade freer. We’re willing to stick with him through the negotiation,” Kaufmann said. “If nothing has changed, and we’re in an all-out trade war, and it’s six to eight months from now and you ask me this question, I may have a different answer.”
Will trade voters stick with Trump because they know something has to be done because the trade deficits are too big? $800 billion simply is not sustainable.
But Trump has a limited amount of time. As we get closer to the midterms, if Trump has nothing to show on trade, including trade agreements, and only retaliation and injured manufacturers and farmers, there will be hell to pay. So, Trump has a chance to make major changes in the trade area, but he cannot blow the chance and waste the crisis. That Obama mistake is one that Trump cannot afford to make.
Now the burden is on USTR Robert Lighthizer and Secretary Wilbur Ross at Commerce to negotiate and finalize trade agreements.
If anyone has any questions about these cases or about the Trump Trade Crisis, the antidumping or countervailing duty law, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.