“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR MARCH 26, 2017
Although politicians in Washington DC have been focused on Obamacare and Russian involvement in the election, trade issues lurk beneath the surface. Trade was stirred up with the release of Trump’s Trade Agenda, Lighthizer Confirmation Hearings, rumors of internal fights in the Trump trade team and meetings with foreign leaders, including Angela Merkel of Germany. In fact, the amount of material on trade is mountainous.
One of the pillars for Trump’s objective of hitting a 3 percent annual growth rate (Obama never got over 2%,), is increased US exports, but as indicated above, trade is a two-way street. As Democratic Congressman Rick Larson of Washington stated recently at the Washington Council on International Trade Meeting on March 13, the Trump Administration has to choose between a trade policy of Trade Agreements or Border Adjustment Taxes. If the Trump Administration intends to hit imports with increased Border Adjustment Taxes, it will be very difficult to negotiate trade agreements with the many countries on Trump’s list.
On March 21st, in pushing the Republicans in the House of Representatives to push for the Obamacare repeal bill, President Trump stated that without the Obamacare repeal, the Republicans cannot take up the Tax Bill. But with the collapse of the Obamacare repeal on March 24th, Congress is pivoting to Tax Reform. That means tax reform, including the Border Adjustment Taxes, will be front and center. The target of Trump and the Republican Congress is to pass a tax reform bill by August.
Thus the Trump Administration will be soon at a crossroads—increased taxes/tariffs on imports or trade agreements. It will be very difficult, if not impossible, to have both.
Meanwhile, the decision of Senate Democrats to stall on the Confirmation of Robert Lighthizer has hurt the trade debate in the Administration. Lighthizer knows trade law. Many of the officials, such as Steve Bannon and Peter Navarro, in the Administration, do not know trade law and the Democratic decision to stall the confirmation truly has hurt the United States.
In addition to Border Adjustment taxes, this newsletter contains several articles about Trump and Trade or the Trump Trade Report. There are growing arguments between Administration officials and by Republican Senators and Representatives outside the Administration on the Trump Trade Policy as officials and Senators and Congressmen understand the ramifications of a protectionist trade policy on the constituents in their States and Districts.
Agriculture is waking up. During the recent March 14 Confirmation Hearing of Robert Lighthizer, one could see the concerns of Senators from Agricultural States as they realize that agricultural exports, their ox will be the one gored by the new Trump trade policy.
Meanwhile, NAFTA will be renegotiated; CFIUS may include reciprocity: China is taking a divide and conquer strategy on the Non-Market Economy Issue in Antidumping Cases; and new trade cases have been filed on Aluminum Foil and Silicon Metal.
ZTE has agreed to pay record fines because of its export control violations; and a recent section 337 patent case stated that the US production of the patent lessee can be used to meet the domestic industry requirement.
In addition, hopefully Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them without curtailing imports, will expand.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address firstname.lastname@example.org.
TRUMP TRADE REPORT
TRUMP ADMINISTRATION ISSUES ITS 2017 TRADE POLICY AGENDA AND IT CREATES CONCERNS
On March 1, 2017, the Trump Administration issued its attached National Trade Policy Agenda for 2017 pursuant to 19 U.S.C. § 2213(a)(l)(B), 2017 TRUMP Trade Agenda. In the short summary, which was released on March 1st, Trump stated in part:
“The overarching purpose of our trade policy – the guiding principle behind all of our actions in this key area – will be to expand trade in a way that is freer and fairer for all Americans. Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and other exports.
As a general matter, we believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations – and by renegotiating and revising trade deals when our goals are not being met. Finally, we reject the notion that the United States can strengthen its geopolitical position by adopting trade measures that make American workers, farmers, ranchers, and businesses less competitive in global markets.”
In other words, the Trump Administration will take a much stronger position on trade agreements and trade policy.
The most controversial part of the Trade Policy Agenda is the strict approach to the WTO. Thus, one of the key objectives of the Agenda is”
“Resisting efforts by other countries – or international bodies like the World Trade Organization (“WTO”) – to weaken the rights and benefits of, or increase the obligations under, the various trade agreements to which the United States is a party.”
The Agenda then states under the section “Defending Our National Sovereignty Over Trade Policy”:
“it has been a basic principle of our country that American citizens are subject only to laws and regulations made by the U.S. government – not rulings made by foreign governments or international bodies. This principle remains true today. Accordingly, the Trump Administration will aggressively defend American sovereignty over matters of trade policy.”
One of the key objectives, just like other Administrations, will be to reduce and eliminate foreign barriers to US exports, but the Agenda then goes on to state:
“It is time for a more aggressive approach. The Trump Administration will use all possible leverage – including, if necessary, applying the principle of reciprocity to countries that refuse to open their markets – to encourage other countries to give U.S. producers fair access to their markets. The purpose of this effort is to ensure that more markets are truly open to American goods and services and to enhance, rather than restrict, global trade and competition.”
One key principle the administration said it plans to apply is a form of trade quid pro quo called “reciprocity” to countries that refuse to open up their markets. Lawmakers and the Trump administration are considering toughening up national-security reviews of foreign investments into the U.S. to leverage better trade terms with China. If Beijing does not open up its markets to U.S. investors or exports, for example, the administration could use its powers to block Chinese deals to buy U.S. assets, or threaten higher tariffs on Chinese imports.
The Agenda also expresses an interest in using Section 301 of the Trade Act of 1974 to open up restraints in foreign countries to US exports. But 301 has not been used since the WTO’s 1995 inception. The Agenda states
“Properly used, Section 301 can be a powerful lever to encourage foreign countries to adopt more market-friendly policies. The Trump administration believes that it is essential to both the United States and the world trading system that all U.S. trade laws be strictly and effectively enforced.”
The Agenda also singles out trade deficits with China, Mexico, Canada and Korea and calls for a renegotiation of trade agreements and a more aggressive approach to trade enforcement. Although these policies are very aggressive on paper, the question is how will the new Trump Administration apply these policies.
In conclusion, the Agenda states:
“For more than 20 years, the United States government has been committed to trade policies that emphasized multilateral agreements and international dispute settlement mechanisms. The hope was that by giving up some of our willingness to act independently, we could obtain better treatment for U.S. workers, farmers, ranchers, and businesses, Instead, we find that in too many instances, Americans have been put at an unfair disadvantage in global markets. Under these circumstances, it is time for a new trade policy that defends American sovereignty, enforces U.S. trade laws, uses American leverage to open markets abroad, and negotiates new trade agreements that are fairer and more effective both for the United States and for the world trading system, particularly those countries committed to a market-based economy.”
The Trump Administration also stated that it intends to update the document when Congress confirms Robert Lighthizer as the next US Trade Representative.
Parts of the policy document contain arguments similar to those in a widely attached circulated memorandum Mr. Lighthizer wrote in 2010 to the US China Commission, LIGHTHIZER 2010 STATEMENT US CHINA ECONOMIC SECURITY COMMISSION. At the time, Mr. Lighthizer told a congressionally mandated China commission that the U.S. could put its WTO commitments on hold, restricting imports from China until the country changes its behavior in key areas.
When the Trump Trade Agenda came out, the Press reported that the Trump Administration will ignore adverse decisions from the WTO. During the Obama Administration, however, although WTO decisions were not ignored, they were slow walked, especially in the antidumping and countervailing duty area, with only small changes made in response to the WTO decision.
The Trump Administration will probably follow the same procedures. The rubber will only meet the road when in response to adverse WTO decisions, foreign countries work up retaliation lists. Then the Administration will have to decide whether to ignore the WTO decision or not.
In fact, after the Agenda was released, Presidential spokesman Sean Spicer stated that noncompliance with the WTO was not the formal policy of the administration.
In addition, many trade experts believe that the Trade Agenda was just rhetoric and we will need to see whether in the future there truly will be a fundamental shift in actual trade policy. As one trade expert told me, it will take years for this policy to actually work out.
Moreover, as indicated below, Agriculture is waking up. Now that Agricultural Senators and Congressmen realize that if there is a trade war, their ox is the one that will get gored, agriculture exports will be seriously hurt, the Trump Administration will probably slow up its aggressive trade policy as the hot protectionist rhetoric meets the realities of the international trade system where trade is a two way street.
If the United States truly signals it will not comply with WTO decisions, and other countries impose retaliatory penalties against U.S. imports, it could usher in an era of economic protectionism worldwide, which could trigger a global trade war that could disrupt international business and growth. But that also would mean that the Trump Administration will not meet its 3% GDP growth target for the entire economy.
The real issue that the Trump Administration simply does not understand is that even though there may be trade deficits, free trade rises all boats. The US now has over $1 trillion in exports, but the Trump Administration is focused on trade deficits with countries, such as China, Mexico and Germany. The Trump Administration ignores the trade surpluses with other countries. More importantly, free trade agreements have caused all boats to rise, increasing economic activity in the United States and creating jobs. Because of NAFTA, US exports have quintupled creating millions of new jobs, but the Trump Administration appears to focus only on the trade deficit, which is relatively small in comparison to the surge in US exports.
At the same time that the White House issued its trade agenda on March 1, John Brinkley of Forbes, in an article entitled, “Trump’s Trade Ideas As Bad As Ever,” responded to on President Trump’s first “State of the Union” address to the Congress where Trump stated:
“I believe strongly in free trade, but it also has to be fair trade.
Fine, but how do you achieve fair trade? Is it to punish other countries whose trade policies aren’t advantageous to the United States? Or is it to work with them collegially to get them to change those policies?
The latter course is the one that all presidents since World War II have chosen. They have negotiated 14 free trade agreements with 20 countries – agreements that require parties to eliminate tariffs and give fair and equitable treatment to one another.
Previous presidents helped set up the GATT and then the World Trade Organization as a forum for ensuring that countries play by the rules of global trade. Since the WTO was created in 1994, the United States has quietly resolved hundreds of trade disputes in its favor through WTO-sponsored consultations.
When consultations don’t solve the problem, the government can file a formal complaint in the WTO’s Dispute Resolution Body. If it rules in our favor, we can impose temporary, retaliatory tariffs or demand compensation.
That is fair trade. Accusing other countries of taking advantage of us, threatening them with exorbitant tariffs, and declaring that the United States is not beholden to WTO rules, as the Trump administration did today, is not fair trade. It’s more like anarchy.
On March 8, 2017 after the Trade Policy Agenda was issued, John Brinkley of Forbes published another article entitled, “Trump’s Disdain For WTO Portends Only Trouble” stating:
After the World Trade Organization was established in 1995, the Clinton, Bush and Obama administrations made good use of its dispute settlement system. The United States is batting about .500 in cases that proceeded to a final ruling; most of them don’t. Barack Obama had a perfect record in the WTO when he left office, but some of the complaints his administration filed are still pending.
None of the three presidents said the system was unfair or tried to make an end run around it.
Then came Donald Trump. He has nothing but disdain for the WTO and for the very idea of an international organization making and enforcing rules that the United States has to obey. So, in keeping with Trump’s “America First” ideology, the White House declared last week that America doesn’t have to follow those rules.
When one country accuses another of a trade rule violation, such as dumping a product in the host country at below-market value or unfairly subsidizing a domestic industry, the first step toward resolving it is a WTO-sponsored consultation between the two governments. If that fails, the accuser can request a hearing by a dispute settlement panel. The loser of that proceeding can take its case to the WTO’s Appellate Body.
Between 1995 and 2015, the United States filed 109 complaints to the WTO’s Dispute Settlement Body and had 124 filed against it. The U.S. government has settled about two-thirds of them through consultations, thus making recourse to a hearing unnecessary. Like most diplomatic initiatives, these results are achieved out of the public eye and without fanfare.
It’s hard to know what the Trump administration finds objectionable about this system, or why he considers the WTO “a disaster.” None of the WTO’s 163 other members seem to have a problem with it.
But Trump and his merry band of protectionists think they know a better way: to ignore the WTO if it issues a ruling they don’t like.
The President’s Trade Policy Agenda for 2017 says legislation enacted in 1994 lets the administration decide arbitrarily whether to comply with a WTO dispute settlement ruling that goes against the United States.
“If a WTO dispute settlement report is adverse to the United States, [the U.S. Trade Representative shall] consult with the appropriate Congressional committees concerning whether to implement the report’s recommendation, and, if so, the manner of such implementation and the period of time needed for such implementation,” the Trade Policy Agenda says.
In other words, the United States will comply with WTO decisions – decisions based on rules that the United States helped write – if it feels like it. Incredibly, Trump, et al, seem to think this approach would have no negative consequences.
If the U.S. government refuses to comply with a dispute settlement ruling against it, the WTO can authorize retaliation by the aggrieved party. That is likely to be a tariff increase targeted at the industry whose trade practices led to the adverse ruling. If a targeted tariff increase isn’t feasible, the aggrieved country can raise tariffs against some other industry.
Presumably, Trump would then retaliate against the retaliator and off we’d go into a destructive trade war.
It’s important to understand that the United States was intimately involved in the creation of the WTO and the drafting of its rules. During previous administrations, the U.S. ambassador to the WTO was in Geneva almost every day protecting the interests of the American industries and workers. Contrary to what Trump says, the WTO is not a foreign body accountable to no one. It’s a democratic institution, accountable to its members.
As former U.S. Trade Representative Michael Froman said in the President’s Trade Agenda for 2014:
“A robust international trading system offers the greatest economic benefits when all trading partners abide by their commitments and play by the same rules.”
LIGHTHIZER CONFIRMATION HEARING
On March 14, 2017, the Senate Finance Committee held its confirmation hearing on Robert Lighthizer as United States Trade Representative. One can see the confirmation hearing in its entirety at https://www.c-span.org/video/?425333-1/us-trade-representative-nominee-testifies-confirmation-hearing
But as of March 23, 2017, Lighthizer’s confirmation vote is being held up in the Committee and on the Senate floor because his status as an advocate more than 30 years ago for the Brazilian government in a 1985 trade case, prior to the time when I was an associate at Skadden, Arps, appears to require a waiver in order for him to assume his role at USTR. Unfortunately, this decision has left Lighthizer, the best trade lawyer on Trump’s team, out of the internal discussions on trade policy.
The White House has itself pushed to make the waiver vote unnecessary. White House counsel Donald F. McGahn wrote to Hatch and Senate Majority Leader Mitch McConnell, R-Ky., on March 3 citing a Clinton-era Office of Legal Counsel opinion as a challenge to the waiver rule.
A week after the March 21st confirmation hearing, Senator Pat Roberts of Kansas stated:
“I think we made it clear, I think [Finance Chairman] Orrin Hatch made it very clear that it’s not needed. But I don’t know what mood our friends across the aisle are in, and I have no idea what they’re going to do.”
Senator Ron Wyden ranking Democrat on the Senate Finance Committee, however, stated:
“We’ve made it clear we’re going to insist on the waiver. There’s this quaint idea that the law should actually matter, and the law says a person in his position has got to get a waiver.”
Thus Lighthizer’s nomination has been held up “for what feels like eons” according to Wyden, but at this point in time it is still not moving.
Meanwhile on March 22, 2017, the U.S. Chamber of Commerce in the attached letter, chamber_letter, pushed for a quick vote Lighthizer for USTR stating:
“Mr. Lighthizer has led a distinguished career as a trade policy practitioner and has a reputation as a staunch advocate for American industry. The Chamber believes he will represent the nation’s interests well as he works with international partners and addresses trade challenges at the negotiating table and before the World Trade Organization. The Chamber encourages a swift vote on his nomination and looks forward to working with him as the next U.S. Trade Representative.”
During the Confirmation hearing, Lighthizer had bipartisan support with many Democratic and Republican Senators vouching support for his candidacy. One of the two issues of primary importance was the decision to break mega deals, such as the TPP, into bilateral deals with individual countries.
The problem, however, is that trade deals take a lot of time to negotiate. The TPP took almost 10 years to negotiate with the 12 countries involved. But by abandoning the TPP, with an objective of creating individual trade deals with the TPP member companies, the US Government has probably quintupled its work load, if not increased it twelve fold.
Although Lighthizer indicated that USTR would use the TPP draft agreement as a basis to negotiate a number of bilateral agreements, negotiating that many trade deals will take an enormous amount of work by a very small agency – USTR—with only just over 200 employees at offices in Brussels Belgium, Geneva Switzerland and Washington DC. Trump’s budget is not clear whether USTR will get an increase in budget or whether its budget will be cut.
The second point is the importance of Trade Deals to US Agriculture exports. In the Lighthizer confirmation hearing, all of a sudden Senators from agriculture states started to wake up. If the TPP had passed, the biggest winner would have been US agriculture exports with tariffs dropping on more than 18,000 different products, many being agricultural products. Now the TPP is gone and countries are racing into those overseas markets to replace US agricultural products.
Agriculture Senators and Congressmen want trade deals now because the United States is exporting billions of dollars in agricultural products to the rest of the World. Mexican government officials recently declared that since Trump wants to be tough on trade with Mexico, they will cut $2.4 billion in imports of corn from the United States and replace the US corn with corn from Brazil and Argentina. Congressman Newhouse at a recent Washington Council on International Trade stated that after the Korea FTA, exports of Washington State cherries doubled and Washington State French fries increased by 52%. Increased exports means more jobs.
With a decision not to do the TPP, Senators and Congressmen from agricultural states fear that other countries will replace the United States and get those benefits. As indicated below, that is a real and justified fear.
TRUMP TRADE AGENDA—OPPOSITION TO THE TRUMP TRADE POLICY IN THE ADMINISTRATION AND IN CONGRESS
Part of the Trump trade problem is the perception by Trump and many on his internal trade staff, such as Peter Navarro, that trade is a one-way street. The Administration apparently believes it can simply issue an executive order raising tariffs, taxes or barriers to imports with no reaction by foreign countries.
But the Trump Administration is now in the international arena. Although Trump won the Presidency, he has no political power over foreign countries. Trade is a two-way street and as stated in several past newsletters, Mexico, Canada, China, and Germany have all threatened retaliation if the US imposes trade restraints, including Border Adjustment Taxes. Deals have to be negotiated, but most countries, including the US, will not negotiate a deal when a gun is pointed at their head.
INTERNAL ADMINISTRATION TRADE FIGHTS—NAVARRO CREATES AN INTERNAL TRADE WAR
On March 10th the Financial Times reported that a trade war had broken out in White House in what was called “a fiery meeting” in the Oval Office pitting economic nationalists close to Donald Trump against protrade moderates in Treasury and the Economic Council from Wall Street.
Navarro is the ultra-nationalist economist who has angered Berlin and other European allies by accusing Germany of currency manipulation and exploiting a “grossly undervalued” euro and calling for bilateral discussions with Angela Merkel’s government over ways to reduce the US trade deficit with Germany.
The fight was between trade hardliners, such as Steve Bannon and Peter Narvarro, against the free trade economic faction led by Gary Cohn, the executive from Goldman Sachs, who heads the National Economic Council. Note that since Lighthizer has not been confirmed, he could not be part of the discussion. Bannon and Navarro support the Border Adjustment Tax while Cohn and Treasury Secretary Mnuchin oppose it.
During the last several weeks, Navarro appeared to be losing influence. But during the recent Oval Office fight, Mr Trump appeared to side with the economic nationalists.
Mr Navarro’s case has angered Republicans in Congress because he was criticized for being illprepared and vague at a closeddoor briefing he held with Senators in February.
Reports have been made that Mr Navarro is becoming increasingly isolated in the administration. He has been operating with a very small staff out of an office in the Old Executive Office Building adjacent to the White House, while Mr Cohn has been adding staff to his NEC base inside the West Wing of the White House.
On March 5th, Navarro published an op-ed in the Wall Street Journal on why trade deficits matter:
Do trade deficits matter? The question is important because America’s trade deficit in goods is large and persistent, about $2 billion every day. . . .
Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth. . . .
Similarly, if the U.S. uses its leverage as the world’s largest market to persuade India to reduce its notoriously high tariffs and Japan to lower its formidable nontariff barriers, America will surely sell more Washington apples, Florida oranges, California wine, Wisconsin cheese and Harley-Davidson motorcycles. Just as surely, the U.S. trade deficit would fall, economic growth would increase, and real wages would rise from Seattle and Orlando to Sonoma and Milwaukee. . . .
But running large and persistent trade deficits also facilitates a pattern of wealth transfers offshore. . .
Might we lose a broader hot war because America has sent its defense-industrial base abroad on the wings of a persistent trade deficit?
Today, after decades of trade deficits and a mass migration of factories offshore, there is only one American company that can repair Navy submarine propellers—and not a single company that can make flat-panel displays for military aircraft or night-vision goggles. Meanwhile, America’s steel industry is on the ropes, its aluminum industry is flat on its back, and its shipbuilding industry is gathering barnacles. The U.S. has begun to lose control of its food-supply chain, and foreign firms are eager to purchase large swaths of Silicon Valley’s treasures.
Much of Wall Street and most economists simply don’t care. But to paraphrase Mike Pence on the 2016 campaign trail, the people of Fort Wayne know better. The analysts at the Pentagon know better, too. That’s why, for both economic and national-security reasons, it is important to bring America’s trade back into balance—through free, fair and reciprocal trade.
As indicated below, however, do trade deficits justify increased US barriers to imports? Wouldn’t a policy of making companies more competitive with imports, such as Trade Adjustment Assistance for Companies, explained below be a better option. TAA does not risk retaliation from other countries.
Moreover, as stated above, focusing on trade deficits ignores the enormous increase in US exports to those countries. Navarro focuses on a trade deficit and ignores the fact that US exports are over $1 trillion and support millions of jobs. A trade war will cut those exports and jobs in half. That will not make America great again.
Recently Navarro attempted to intervene in an antidumping duty case at the Commerce Department on Oil Country Tubular Goods from Korea sparking outrage from the trade lawyers representing the Korean steel mills. Navarro should keep in mind that the Commerce Department in antidumping cases makes its decision based on the facts on the administrative record and the Commerce Department’s determinations are subject to Court review by the Court of International Trade and the Court of Appeals for the Federal Circuit. In the past, Courts have made clear that when a Government agency, such as the Commerce Department, makes a decision based on politics, that is a reason for depositions of the government official. Navarro might be deposed in any appeal of the OCTG case to the Court.
On March 13, John Brinkley of Forbes in an article entitled, “Commerce Secretary Ross Thinks U.S. Is In A Trade War”, which also addressed Navarro’s thinking, stated:
Commerce Secretary Wilbur Ross, responding to concerns that the Trump administration is pushing the United States toward a trade war, said we were already in one.
“We’ve been in a trade war for decades,” he said last week in an interview with Bloomberg News. “That’s why we have the (trade) deficits.”
But not to worry, Ross said. “It’s not going to be a shooting war. If people know you have the big bazooka, you probably don’t have to use it.”
That’s the Luca Brasi negotiating method: bend to our will or we’ll blow you to smithereens. Peter Navarro, the head of the White House National Trade Council, recently suggested that future trade agreements include a rule stating that they can be renegotiated any time the U.S. runs a trade deficit with the partner country. That is, to put it mildly, a non-starter.
Ross’s and Navarro’s remarks are symptomatic of the Trump administration’s singular obsession with trade deficits. However, the fact that the United States has a global trade deficit does not mean we’re in a trade war. It doesn’t mean our trading partners are cheating us any more than that we’re cheating Canada and the United Kingdom by running trade surpluses with them. It means we import more than we export. One of the reasons for that is the strength of the dollar in foreign exchange markets. A strong dollar makes imports less expensive and exports more expensive. That, in turn, leads to more choices and lower prices for American consumers.
Navarro said in a recent speech that trade surpluses were synonymous with economic growth. History suggests otherwise. The U.S. economy added 235,000 jobs in February and the unemployment rate fell to 4.7%. The trade deficit in January (February not available yet) was $48.5 billion, the highest it’s been since March 2012.
The trade deficit decreased during the recession of 2008-09. The United States ran a trade surplus through most of the Great Depression.
Ross didn’t say who the enemy was in this supposed trade war, but President Trump has made it clear that he has it in for China and Mexico, our second and third largest trading partners, respectively. Our largest bilateral trade deficits are with those countries.
So, Trump intends to renegotiate NAFTA. And, he has threatened China with punitive tariffs. He has said doing these things would erase the U.S. trade deficit, cause a renaissance of American manufacturing jobs and bring the 3% GDP growth he promised.
They would do none of those things.
“Withdrawal from the Trans-Pacific Partnership, renegotiation of the North American Free Trade Agreement, and launching trade actions against China ensure political headlines, but they will not make much difference to the global U.S. trade deficit. Nor will they bring more jobs and higher wages to U.S. workers,” said Gary Clyde Hufbauer and Euijin Jung of the Peterson Institute of International Economics in an article published in February.
They also noted that the trade deficit is financed in part by foreign direct investment, which is unquestionably beneficial to the U.S. economy. Foreign-owned companies operating in the United States directly employ 6.1 million Americans, according to the U.S. Commerce Department. FDI stock in the U.S. stands at almost $3 trillion.
One way to reduce the trade deficit would be to devalue the dollar against the Chinese yuan and other currencies. That would be politically difficult because it’s what Trump (wrongly) accuses China of doing on a regular basis. It would also raise the prices of imported food and manufactured goods and, possibly, cause inflation. That would hurt low-income Americans the most.
A better idea would be for the Trump trade triumvirate to calculate America’s balance of trade with its 20 free trade agreement partners. They would find that we have an aggregate trade surplus with them. Maybe then they’d reconsider their plans to renegotiate or withdraw from those agreements.
If Ross thinks we’re in a trade war now, let him propose raising tariffs against Mexico and China over and above the World Trade Organization’s Most Favored Nation rates. Then, we’d be in a trade war for real.
NAVARRO’S STANDING WITH CONGRESS DROPS
On March 16th, senior trade officials from the administration, minus Robert Lighthizer, headed up to Capitol Hill to talk with members of the House Ways and Means Committee about NAFTA, among other trade topics – marking the latest step in what one administration official described as a series of ongoing consultations between the administration and Congress before the White House formally moves to reopen the agreement.
The next step will be for the administration to formally notify Congress that its NAFTA plans to begin talks, triggering a congressionally mandated 90-day consultation period before the renegotiation can start.
Commerce Secretary Wilbur Ross stated that the White House hopes to send that notification letter “sometime in the next couple of weeks,” meaning formal talks are likely to begin around early summer. Ross is expected attended the March 16th meeting, as did senior members of the Office of the U.S. Trade Representative including general counsel and acting USTR Stephen Vaughn, and deputy general counsel Maria Pagan.
Peter Navarro, however, did not go to the Capital Hill meeting. After a meeting with the Senate Finance Committee in February – which was described as “a disaster” – Navarro made such a poor impression that Senators viewed it as a reason for why they need to get USTR nominee Robert Lighthizer confirmed as soon as possible. That meeting also spurred additional questions about who is really in charge on trade and led to strong reminders that USTR holds the statutory authority.
G-20 BECOMES MORE PROTECTIONIST
On March 18th, the trade protectionist rhetoric increased as it was reported that the G-20 member states dropped the no-protectionism pledge, which indicates more trade storms to come. The G20 is an informal forum on economic cooperation made up of 19 countries plus the European Union. Finance ministers from the Group of 20 countries met in the southern German town of BadenBaden and issued a statement saying only that countries “are working to strengthen the contribution of trade” to their economies. In last yearʹs meeting under the Obama Administration, called on countries to resist “all forms” of protectionism, which can include border tariffs and rules that keep out imports to shield domestic companies from competition.
During the press conference, I was told that U.S. Treasury Secretary Steven Mnuchin, was peppered with questions about the border adjustment tax. Munchin did state that trade deals need to offer a win-win scenario and went on to state:
“We believe in free trade: we are one of the largest markets in the world, we are one of the largest trading partners in the world. Having said that, we want to reexamine certain agreements… And to the extent that agreements are old agreements and need to be renegotiated weʹll consider that as well.”
AGRICULTURE WAKES UP BECAUSE IT REALIZES HOW MUCH IT WILL LOSE WITH A PROTECTIONIST ANTI TRADE POLICY
In the past, many reporters have asked me what could China or other countries retaliate against. The United States does not export much. US exports are simply too small. In the face of large trade deficits with China, Mexico and other countries in the manufacturing area, what is the US exporting that can be a retaliation target?
US trade data indicate that US exports for 2016 were over $1 trillion. In the Robert Lighthizer confirmation hearings, you could hear the real concern of many Senators, especially from the agriculture states, that products from their states could be retaliation targets. Their worry is certainly justified.
As Senator Pat Roberts stated at the Lighthizer Confirmation hearings:
“I’m going to try and demonstrate that we are going through a pretty rough patch in agriculture. If Trump makes good on his promises to turn U.S. trade policy into a war against imports, “we are going to get into a very difficult situation.”
During the Confirmation Hearing, Roberts, Grassley and other Agriculture Senators extracted a pledge from Lighthizer that in negotiating trade agreements he would push agriculture interests to the top of the list. Senators and Congressmen from Agriculture states fear that if no new trade agreements are negotiated, US agriculture will lose market share and will become the retaliation target of other countries.
Mexico, in fact, is one of the largest buyers of US corn, much of which comes from Kansas and Iowa. US exports about $2.4 billion in corn to Mexico. Now Mexico is talking about retaliation and buying its corn from Brazil and Argentina. What goes around comes around.
U.S. Senators and Congressmen noticed when a Mexican lawmaker introduced legislation favoring Latin American products over American- exported corn, a key winner in Nafta. That move followed warnings from Mr. Trump that Nafta would be renegotiated and Mexico would have to pay for a new border wall. In response, Republican Senator Joni Ernst of Iowa stated:
“I have been worried because other countries have pushed back: ‘You want us to build a wall, well we’re not going to take your corn.’ If we’re talking about renegotiating Nafta, we actually stand to lose ground in agriculture—so we would really have to work that very, very carefully.”
On March 6th, leaders of the US Dairy industry were in Mexico to attempt and protect their exports from uncertainty over the future of NAFTA. After NAFTA was signed in 1994, American dairy exports to Mexico more than quadrupled to $1.2 billion, accounting for nearly one-fourth of all U.S. dairy exports last year. Because of Trump’s attacks on Mexico, it has encouraged Mexican importers to find other suppliers in the European Union and New Zealand, which are eager to get into the market, and in New Zealand’s case are part of the TPP.
In response to the criticism that Trump is putting his trade focus on the plight of the U.S. manufacturing sector at the expense of the export-dependent agriculture sector, on March 21st Trump pivoted to agriculture. Sean Spicer, the President’s press secretary stated:
“While our farmers are the most efficient in the world, margins have been tightening, regulations have been multiplying, and exports, which has historically counted for over one- fifth of the U.S. farm production, have been declining due to unwise trade policies. The President promised the many people in the agriculture industry and throughout rural America that he would not allow this to continue and he will continue to pursue policy changes that will reverse this disturbing trend.”
John Bode, president and CEO of the Corn Refiners Association praised the statement saying that Trump’s proclamation recognizes that “improved trade balances and a successful agriculture sector are inextricably linked.” He further stated:
“Our industry’s exports not only deliver jobs at home, they are among America’s fundamental strengths abroad. We are heartened to know that this White House agrees and that they will seek to increase agricultural exports as they examine existing and future trade agreements.”
Ray Starling, special assistant to the president for agriculture on the National Economic Council, recently stated at a National Ag Day event in Washington:
“The President has talked a lot about our manufacturing imbalance on trade, but that is not meant to neglect ag. That is essentially to say we know ag is doing a good job, we are making strides there, we need to do more.”
Now we have to wait and see if Trump truly means what he says or whether he wants a trade war, which will hurt US exports, especially in the agriculture area.
SENATORS AND CONGRESSMEN WANT MORE TRADE DEALS–BILATERAL VERSUS MULTILATERAL DEALS
Back on January 26, 2017 in an interview with Sean Hannity on Fox News, Trump explained that he did not like multilateral trade deals, such as the TPP, because they are a mosh pit and fall to the lowest common denominator.
During his confirmation hearing, Commerce Secretary Wilbur Ross stated that it easy to negotiate bilateral deals than multilateral deals. But the question is, will it be easier to negotiate 12 bilateral deals with 12 different countries when one deal, the TPP, would have done it. More importantly, although the US will renegotiate NAFTA and start trade deals with Japan and eventually Britain, is it truly realistic for the very small USTR to have continual negotiations with dozens of countries at the same time. The TPP took 10 years to negotiate. Maybe Ross is just playing a game and does not want more trade deals.
At a recent trade conference on March 13th here in Seattle held by the Washington Council on International Trade, however, it was very apparent that Washington State Congressmen, both Democrats and Republicans, want more trade deals.
At the Conference Congressman Dave Reichert, WA Republican, and Chairman of the Subcommittee on Trade, House Ways and Means, stated that the Trump Administration intends to do more bilateral deals. He also stated that since NAFTA is a trilateral agreement, all three countries, Mexico, Canada and the US need to be at the table.
Reichert also stated that we cannot give up trade agreements because the cost would be too high. China will benefit. He also stated that the United States needs to set the international trade standards through trade agreements or China will do so and 95% of the World’s population and markets are outside US.
Reichert stated that the longer we wait to do trade deals, the more market shares we lose. He pointed to the FTA with Korea, which dramatically reduced the 24% Korean tariff on cherries, and Washington State cheery exports doubled and Washington French Fries went up 53%.
When NAFTA took place US exports to Mexico doubled reaching $180 billion. There is now over $500 billion in trade between US and Mexico
Following Reichert, Republican Congressman Dan Newhouse, who represents large Agricultural interests in the Center of Washington stated, “We cannot afford to waste any time as we create opportunities for local producers and exporters to gain access to new markets.”
Congressman Rick Larsen stated that the Administration has to decide whether it will do Border Adjustment taxes or trade deals. Larsen went on to state that trade is much bigger than just agreements. It is soft power. Asian countries see the US leading with military power, but the US relationship with the other Asian countries is less secure if the only relationship is military and not trade.
Democratic Congressman Denny Heck stated that TPP went too far too fast and was not politically possible. Echoing Donald Trump, Heck stated that the white working man has seen no increase in income in 40 years.
But Newhouse stated that after the Korea FTA, Washington State potato growers saw an increase in exports of 670,000 tons of French Fries to Korea. That is jobs.
On March 22nd, John Brinkley in an article entitled, Trump’s “Trade Policies Would Take From the Many and Give To a Few” points out the problem of relying only on bilateral agreements as compared to multilateral agreements:
“Politics can be defined as taking something from someone and giving it to someone else. Done right, the winners outnumber the losers and the sacrifice will have been worthwhile.
This seems lost on the Trump administration, whose trade proposals are likely to create a lot more losers than winners.
Let’s start with his plan to eschew multilateral trade agreements and negotiate only bilateral ones. With a multilateral agreement, like the Trans-Pacific Partnership, all parties play by the same rules. That means exporters don’t have to figure out what the rules of origin are country-by- country. They’re all the same.
Deciphering and complying with rules of origin under a free trade agreement are among the most difficult and time-consuming chores that exporting companies have to perform. If the rule says 70 percent of a truck’s parts have to have been made in the United States, the company has to go to its suppliers and say, where did the door handles come from? Where did the tires come from?
A lot of smaller companies find it isn’t worth the time and expense, so they ship the product and pay the tariff. Or they don’t export at all.
Having a series of bilateral agreements makes it even harder, because each agreement would have its own rules of origin. American manufacturers were looking forward to ratification of the TPP, because it was to be a 12-country trading bloc with one set of rules. But Trump withdrew the United States from it.
Renegotiating NAFTA is another idea that would take from the many for the benefit of a few.
Breaking up NAFTA and negotiating separate bilateral agreements with Mexico and Canada would be even worse. U.S. Trade Representative nominee Robert Lighthizer said during his Senate confirmation hearing that the administration might take that course.
NAFTA has been in effect for 23 years. Whatever impacts it had on American employment and economic growth are well in the past. If you look under NAFTA’s hood, you see a complex network of supply chains crossing the three countries’ borders. They make it easy and cost-effective for American manufacturers to buy parts from Mexico or Canada and have them delivered quickly and duty-free.
About half of Mexico’s exports to the United States are parts for products that are built here – car parts, electronic components and so on.
Making those parts more expensive would make the products they go into more expensive and would reduce the importing companies’ revenues, leading to lay-offs or worse. That is basic economics.
Trump said yesterday that renegotiating NAFTA was “going to be an easy one.” Everyone who has ever been a trade negotiator probably got a chuckle out of that. . .. .
“The United States has been treated very, very unfairly by many countries over the years, and that’s going to stop,” he said last week during a joint press conference with German Chancellor Angela Merkel.
Poor little us. We’re being pushed around by those mean bullies from South Korea and Mexico.
Nonetheless, the U.S. and global economies have been growing at a healthy pace. The U.S. unemployment rate is 4.7 percent, about as low as it can go, and median wages have finally started to increase for the first time since the recession of 2008.
This seems to call for an economic policy of caution and restraint to keep the recovery going rather than taking a machete to our trade agreements and punishing our trading partners for transgressions they have not committed.
That would harm vastly more Americans than it would help.
On February 28th, however, it was reported that the EU expects the Trump Administration to negotiate with the entire block as EU countries pushed back on Trump’s bilateral dreams. European countries in the EU bloc have been unified against the Trump administration’s reported attempts to bring individual EU countries into direct, bilateral trade deals with the U.S. The EU ambassador at a recent National Press Club meeting stated that bilateral deals are “nonsense”. David O’ Sullivan stated:
“It’s nonsense to talk about bilateral deals with countries that are part of a single market. Would American companies really want 28 separate FTAs?”
In Germany, Martin Schäfer, spokesperson for the German foreign ministry, stated:
“The [European] Commission carries out trade negotiations and concludes trade agreements for Europe and for us. This is the legal status, about which we have nothing critical to say. The new political constellation in the U.S. and elsewhere should not tempt anybody to take up a different position.”
European Trade Commissioner Cecilia Malmstrom also stated recently:
“The U.S. administration seems to favor bilateral relations over multilateralism. And some of the proposals we have seen floated, such as a border adjustment tax, could be at odds with WTO rules. Countries should be able to protect themselves from distortions and unfair trade practices. But that has to be done within the framework of the WTO. Global rules mean everyone playing fair, by a consistent, predictable and transparent rulebook.
In an age when some want to rebuild walls, re-impose barriers, restrict people’s freedom to move … we stand open to progressive trade with the world.”
On March 6th, a top European official stated that U.S. President Donald Trump’s protectionist stance may propel Asian, Middle Eastern and Latin American economic powers into market-opening alliances with the European Union. Jyrki Katainen, a vice president of the European Commission, the EU’s executive arm, said Trump’s rejection of multilateral commercial deals and border-tax threat are giving impetus to the 28-nation bloc’s push for free- trade or investment pacts with countries including Japan, China, India, Saudi Arabia, the United Arab Emirates, Mexico, Brazil and Argentina.
Katainen stated that:
“When there has been some signals to raise protectionism, especially from the U.S. side, the rest of the world seems to be fighting back and saying that this is not our line, this is something which we don’t want. This is music to our ears.”
The comments signal that Trump’s “America First” approach that seeks to reduce the U.S.’s $502 billion trade deficit may be as much an opportunity as a threat to the EU.
Recently, the US equipment manufacturing industry, which supports more than 1.3 million jobs, expressed its concern about exports. A report by the Association of Equipment Manufacturers stated that about 30 percent of the construction equipment and about 30 percent of the agricultural equipment manufactured in the United States is designated for export – and would therefore be hit hardest by any slowdown in global trade:
“Slow international growth combined with uncertainty about trading rules under the Trump administration could act as a drag on the equipment manufacturing industry’s overall performance. Any steps the Trump administration might take to revisit or exit existing trade agreements could further complicate the challenging economic environment outside the United States.
It is difficult to precisely forecast how the Trump administration might rewrite existing trading rules, but any steps that make it more difficult for manufacturers to export their products could hinder growth in the industry.”
TPP CONTINUES WITHOUT THE US
On March 14th Government officials from the 12 Trans-Pacific Partnership nations minus the United States held a two-day summit in Chile to discuss a path forward on trade following the US decision to withdraw from the TPP.
New Zealand Trade Minister Todd McClay stated:
“I have recently visited Australia, Japan, Singapore and Mexico, met with ministers from Brunei and Malaysia and talked directly with trade ministers from all other TPP countries. It is clear our partners remain committed to the benefits high quality trade agreements provide.”
Even though the TPP requires that at least six countries composing at least 85 percent of the entire TPP’s collective economic production, with the US withdrawal, the other 11 countries have decided to move forward with the TPP. As Wendy Cutler, a former trade negotiator at USTR, stated:
“A TPP agreement without the U.S. is still relevant and would have significant economic value. You’d still have four of the world’s 20 largest economies — Japan, Canada, Australia, and Mexico — alongside significant emerging economies, like Vietnam and Malaysia.”
In other words, other countries will replace US exports in those markets because they will have the benefit of the TPP.
After the meeting in Chile, Australian Trade Minister Steven Ciobo stated:
“I was particularly pleased there was continuing movement on the TPP. Countries remain committed to exploring all the avenues and opportunities in relation to the TPP. There was broad agreement on the high level of ambition in the TPP being a benchmark and something we shouldn’t just let slip away.”
Japanese State Minister Takao Ochi stated:
“As long as Japan is concerned we don’t want to exclude any possible ways and we would like to take initiative in discussing with each of the member countries.”
The 11 countries will now work to preserve the trade deal’s innovations, which included new rules on digital trade, disciplines for state-owned companies and what have been touted as the toughest labor and environment protections of any modern trade agreement. The innovations also include new market access that countries negotiated on everything from milk powder to insurance services.
BORDER ADJUSTMENT TAXES
As stated in my last newsletters, the big issue in the trade area right now is border adjustment taxes and tax reform. New Treasury Secretary Mnuchin says tax reform will take place in August 2017 and it is a priority for the Trump Administration. Part of that reform is Border Adjustment Taxes (“BAT”). See http://www.foxbusiness.com/politics/2017/02/23/treasury-secretary-mnuchin-lays-out-aggressive-timeline-for-tax-reform.html. As Mnuchin states, a US deficit of $20 trillion, which was doubled by President Obama, is a concern, but more important is economic growth, which will result in more tax revenue. To get economic growth, taxes and regulations have to be cut.
But with the failure of Obamacare in the House, taxes, including border adjustment taxes, move to the front of the Congressional calendar. Trump and Republicans in the Congress, especially the House, appear to be moving ahead with an alternative to tariffs to spur US manufacturing and that is taxes. There is now an attempt in Congress to give American-made products a big tax advantage over their foreign competitors through border adjustment taxes, and, in effect, counter the value added taxes used in other countries to deter imports. As Kevin Brady, Chairman of House Ways and Means, argues, almost 80% of countries border adjust their taxes. That includes Mexico, Canada, China, and the European countries, putting US exports at a substantial disadvantage. For Brady’s argument, see videos at the following links, https://www.youtube.com/watch?v=1yYHGoFmNEk&feature=youtu.be and
Under a border adjustment tax (“BAT”), a 20% tax would be applied against all domestic products and imported products. But the domestic producer would be allowed to deduct all the domestic costs associated with producing that product. Thus if a $100 product was produced in the US, the domestic producer could deduct $70 in costs, resulting in a 20% tax on $30 or a $6 tax. But there would be no deduction of domestic costs for a $100 import resulting in a 20% tax on the full $100 or a $20 tax, giving the domestic product a 14% tax advantage. The BAT would not apply to exports.
This proposal has welled up from the House of Representatives and is strongly supported by House Speaker Paul Ryan and the Chairman of House Ways and Means, Kevin Brady. Their argument is that border adjustment tax is needed to offset value added taxes in other countries. Brady argues that the BAT is the only way to end the “Made in America” tax.
One example given is that if an automobile is produced in the US and exported to Mexico, a 35% corporate tax is levied on the profits of the US automaker and then the US automobile is hit with a 16% value added tax when it comes into Mexico. On the other hand, when an automobile is produced in Mexico for shipment to the US, there is no corporate tax on the export and no corresponding tax in the US on the Mexican export to the US. In effect, Ryan and Brady argue that this is a tremendous incentive to move manufacturing out of the United States to countries with value added taxes, such as Mexico, China, Canada, EU and many other countries.
Border adjustments serve as a way to level the playing field and alter value-added consumption taxes many countries, including European countries, Mexico, Canada and China, impose on each stage of production, as products are sold internationally. Proponents argue that the BAT is not trade policy and does not favor exports over imports. To see the companies that have VAT taxes in place, see the Ways and Means website at https://waysandmeans.house.gov/ending-made-america-tax-three-major- wins-american-people/.
The Trade War in the Administration on border adjustment taxes has become clear as Bannon, Navarro and others are in favor, but Cohn and Treasury Secretary Mnuchin are opposed. Wilbur Ross is on the fence. Trump himself has not taken a position.
On March 25th During a morning interview, Mnuchin said he had been overseeing work on the administration’s tax bill over the past two months and it would be introduced soon. He said the goal was still to win Congressional approval of the tax measure by August. But if the timeline is delayed, he said he expected the proposal to pass by the fall. Mnuchin did not reveal whether the administration will include the Border Adjustment tax.
On March 9th Bloomberg reported that the BAT is in deep trouble. The BAT is important because it is expected to raise more than $1 trillion in revenue, which would offset the cut to corporate tax rates:
Companies that rely heavily on exports, such as Boeing Co. and Oracle Corp., love the plan—for obvious reasons. Beyond profits, they also say a BAT would make American manufacturers more competitive by putting them on equal footing with foreign competitors around the world.
Importers hate the BAT. Big retailers such as Walmart Stores Inc. and Best Buy Co. contend that border adjustments will dent profit margins and force them to raise prices on everything from avocados and furniture to Nike shoes and French cheese. In a Feb. 28 letter to congressional leaders, the Americans for Affordable Products coalition said the tax would raise consumer costs “by as much as $1,700” in the first year. . . .
Companies are taking their message to consumers. In late February the National Retail Federation, which opposes the BAT, started airing TV commercials that parody an OxiClean infomercial, telling shoppers that “the all-new BAT tax is specially designed to make your disposable income—disappear!” Proponents, through the American Made Coalition that includes Johnson & Johnson and Pfizer Inc., launched a Twitter feed to support the tax. Both sides have created Facebook pages and websites with auto-form letters that viewers can send to Congress. Both, too, routinely pepper media outlets with press releases citing prominent people in the private sector and academia who either love or hate it.
As Bloomberg further states in Congress the BAT is running into opposition from Republicans:
A core group of House Republicans has come out in recent weeks against the BAT, citing the higher prices they’d inflict on consumers. Republican Senate support is in doubt, too. Tom Cotton, a Republican from Walmart’s home state of Arkansas, told a Senate floor session on Feb. 15 that border adjustments are “a theory wrapped in speculation inside a guess.” The next day, Senate Majority Whip John Cornyn, a Texas Republican, said, “The hard reality is the border tax is on life support.”
But as Bloomberg further states:
“Ryan and Brady aren’t backing down. Without border adjustments, they say, their plan to rewrite the tax code can’t happen. That $1.1 trillion in revenue is crucial to the politics of the BAT, since it helps keep it deficit- neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes. “What it boils down to is that it’s a way to pay for the rest of the tax plan,” says Veronique de Rugy, an economist at George Mason University. “Only revenue comes from this feature—economic growth doesn’t.” That $1 trillion is also crucial to how the BAT might affect the economy. Says Ross, “That is way too big a number to get wrong.”
EUROPE, THE WTO AND CHINA
Meanwhile, other countries are lining up to retaliate if the BAT is passed. On February 28th, it was reported that the EU is preparing a legal challenge against Donald Trump’s US border tax plan in what could be biggest trade dispute in a century. Jyrki Katainen, the European Commission’s Vice President, told the newspaper: “If someone is behaving against our interests or against international rules in trade then we have our own mechanisms to react.” He said the EU was seeking to avoid a potential trade war with the US as it would be “disastrous” for the world economy.
“We have all the legal arrangements within the EU but we are also part of global arrangements like the WTO and we want to respect the global rule base when it comes to trade.”
One WTO trade dispute expert estimated that a defeat in such a case could see around $385bn a year in trade retaliation against the US. Volker Kauder, parliamentary floor leader of Merkel’s conservatives, also recently stated:
“If Donald Trump imposes punitive tariffs on German and European products, then Europe should also impose punitive tariffs on U.S. products.”
Meanwhile, the Chinese government has been seeking advice from think tanks and policy advisers on how to retaliate against trade penalties imposed by the US. China’s strongest responses would likely include finding alternative suppliers of agricultural products, machinery and manufactured goods, and reducing the number of consumer goods like cellphones and laptops that it exports to the United States. Other possibilities could include levying a tax or other penalty on major U.S. companies that do business in China or restricting access to the country’s services sector.
The first trade agreement, which the Trump Administration will negotiate is NAFTA. President Trump has already formally notified both Canada and Mexico that he intends to renegotiate NAFTA. The negotiations will probably start sometime this summer.
On March 12, 2017, Commerce Secretary Wilbur Ross stated that the Trump administration has yet to determine what the trade agreement replacing NAFTA will look like. As Ross stated:
“One size doesn’t fit all. The issues of automotive are not the same as the issues of agriculture; they’re not the same as the issues of electronics, or steel. It’s a very, very complicated situation. So it’s very hard to paint just with one big broad brush.”
On March 16, 2017, Canadian Prime Minister Trudeau stated:
“NAFTA’s been … improved a dozen times over the past 20 years. There’s always opportunities to talk about how we can make it better. It has led to a lot of great jobs for a whole lot of people on both sides of the border and I very much take him [Trump] at his word when he talks about just making a few tweaks. Because that’s what we’re always happy to do.
“We’ve got auto parts crisscrossing the border six times before they end up in a finished product. You’ve got over $2 billion a day going back and forth. So, making sure that the border is … secure but also smooth in its flow of goods and people is essential to good jobs on both sides of the border.”
Meanwhile, there are a number of meetings between US, Canadian and Mexican officials preparing for the NAFTA negotiations.
On March 21st, the Trump administration created the attached list, KEY ELEMENTS, of more than 20 foreign trade practices it would like to address in a renegotiation of NAFTA and in any bilateral trade deal it might pursue. The list includes relatively new areas like foreign currency manipulation, where achieving agreement could be difficult, but also a host of others like intellectual protection that have long been mainstays in U.S. trade agreements. Payne Griffin, deputy chief of staff at the Office of U.S. Trade Representative, stated:
“These are market problems that the administration has identified either through vigorous consultations with Congress or their own internal research. It is a non-exhaustive list of things that may be addressed in these bilateral trade agreements.”
CHINA NONMARKET ECONOMY
China has initiated a mandatory 60-day consultation period with both economies before deciding to request a dispute settlement panel to hear its complaint. China has now decided to only target the EU, which is in the process of trying to change antidumping methodology. Brussels is trying to come up with a new way of treating China under its trade remedy law while still recognizing that Beijing intervenes heavily in its economy.
The United States has said it would only consider a change in response to a formal request from China to be treated as a market economy, something it has not done since 2006.
Apparently, China is trying a strategy of ‘divide and conquer’. Take on the EU first, because it is already revising its law and they might get a good WTO decision, then face the tougher battle against the U.S.”
MORE TRADE CASES COMING
A law firm that specializes in bringing antidumping (“AD”) and countervailing duty (“CVD”) trade cases recently told me that they are in the process of preparing a number of new cases against China and other countries. With a sympathetic Trump Administration and a very sympathetic Wilbur Ross as the new Secretary of Commerce, more cases are going to be filed.
ALUMINUM FOIL FROM CHINA
On March 9, 2017, the US Aluminum Foil Trade Enforcement Working Group, including Aleris Inc., Alpha Aluminum, Golden Aluminum, Granges Americas Inc., JW Aluminum Company, Novelis Corporation, Republic Foil Inc., Reynolds Consumer Products, and United Aluminum Corporation, filed major AD and CVD cases against more than $658 million of aluminum foil imports from China in 2016.
The petition alleges duties ranging from at a minimum of 38 percent to a high of 134 percent and targets 232 Chinese exporters and producers of aluminum foil. The aluminum foil covered by the complaint covers household aluminum foil as well as aluminum foil used in cookware, product packaging and heat exchangers found in cars and HVAC systems.
US importers can be liable for CVD duties on aluminum foil imports from China as soon as August 6, 2017 and AD duties on October 5, 2017.
Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted Chinese exporters/producers and US importers, 2017.03.08 CHN-ALUMINUM FOIL Petition Vol I 1Narrative IMPORTERNAMES. If anyone has any questions, please feel free to contact me.
SILICON METAL FROM AUSTRALIA, BRAZIL, KAZAKHSTAN AND NORWAY
Although the US industry may believe AD and CVD petitions will move the Chinese imports share to the US industry, that is not necessarily the case. Case in point, on March 8, 2016, Globe Specialty Metals Inc. filed major AD and CVD cases against imports of Silicon Metal from Australia, Brazil, Kazakhstan and Norway. Chinese silicon metal has been under an AD order with shut out rates since 1991.
Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted foreign exporters/producers and US importers, SMALL SILICON METAL PETITION.
The first hearing at the ITC is March 29th. Commerce will issue questionnaires probably in the first week of April. Commerce Department preliminary determinations in the Countervailing Duty cases, which is when liability for importers begins, can happen as soon as August.
If anyone has any questions, please feel free to contact me.
With a sympathetic Trump Administration in power, there will be a sharp rise in AD and CVD cases against China and other countries.
TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS
Previous newsletters stated Wilbur Ross has made it very clear to reach the 3% plus growth rate, the US must increase exports. Yet, at the same time, the Trump Administrations keeps concentrating on deficits and accusing foreign governments of treating US companies unfairly. Trump and his Administration do not look internally and try to find ways to make the US companies more competitive, which will not create a trade war.
The Trade Adjustment Assistance for Firms/Companies program does not put up barriers to imports. Instead the TAA for Companies program works with US companies injured by imports to make them more competitive. The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.
In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure. Yet the program does not interfere in the market or restrict imports in any way.
Right now the total cost to the US Taxpayer for this nationwide program is $12.5 million dollars—truthfully peanuts in the Federal budget. Moreover, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.
As stated in my last blog post, TAA for Firms/Companies works. In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today. For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.
But as also stated in my last blog post, in this environment with so many injured companies, funding for TAA for Firms/Companies has to be increased so it can do its job. Moreover, with the threats of a massive trade war in the air, which will injure all US companies and destroy US jobs, the US government needs to look at an alternative—TAA for Firms/Companies is that alternative.
FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES
UNIVERSAL TRADE WAR CONTINUES
With the election of Donald Trump, as stated in my last blog post, the Universal Trade War will continue. In addition to the US bringing AD and CVD cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia, Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States. These countries have adopted the US law which finds dumping in 90% of the cases. The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.
Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases. What is “fair” trade for the United States is “fair” trade for every other country. Many countries want to make their industries Great again.
Because of this situation, this part of the newsletter will concentrate on trade cases in other countries and how other countries see the trade problem with the United States. It will also discuss potential US exports that can be retaliation targets.
On March 6, 2017, Alexandro N. Gomez-Stozzi, a Mexican trade lawyer, at the Gardere firm in Mexico City sent me the following summary of Antidumping and Countervailing Duty Investigations in Mexico:
Mexican Antidumping and Countervailing (AD/CVD) Investigation Procedures Factsheet
- AD/CVD investigations in Mexico may take from 12 to 18 months as of the publication in the Diario Oficial regarding the initiation of investigation. Terms within the investigative process may be extended with cause, at the discretion of the authority. Investigations are generally conducted as follows (variation of a chart created by Mexican authorities):
- There is a single investigating authority, the Ministry of Economy´s International Trade Practices Unit (known by its Spanish acronym UPCI, for Unidad de Prácticas Comerciales Internacionales). UPCI makes all relevant findings: (i) dumping or countervailing, (ii) material injury or threat thereof and (iii) causation. Final AD/CVD orders are signed by the Minister of Economy; although informally, trade policy considerations in other sectors come into play before deciding to issue an AD/CVD order. UPCI is also in charge of safeguard investigations.
- Investigations are usually requested by Mexican producers representing at least 25% of the total production, although UPCI may initiate investigations if it deems so appropriate.
- Exporters and importers of affected goods are strongly encouraged to retain Mexican counsel, as all appearances have to be made in Spanish and a domestic service address has to be designated.
- When issuing a preliminary determination, the authority may: (1) impose a preliminary AD/CVD duty and continue with investigation, (2) continue the investigation without an AD/CVD duty, or (3) terminate the investigation on insufficient evidence grounds.
- In its final determination, the authority may (i) confirm or modify its preliminary determination to impose an AD/CVD duty, or (2) declare the investigation concluded without imposing an AD/CVD duty. Under stringent circumstances, final determinations may impose retroactive duties for up to three months from date of publication of the preliminary determination.
- During the course of an investigation, Mexican law allows for interested parties to ask UPCI to convene conciliatory meetings, at which proposals may be presented to resolve the case and terminate the investigation. These proceedings coexist with Antidumping Agreement´s price undertakings.
- AD/CVD orders remain in effect for 5 years. They may be renewed for similar periods when warranted after a sunset review which covers both dumping (or countervailing) and injury. Circumvention, actual coverage of AD/CVD orders, and similar proceedings can also be initiated as long as orders are in effect.
- World Trade Organization (WTO)´s Antidumping and Subsidies Agreements are applied as is in Mexican investigation proceedings. Mexican trade-remedy law and regulations may sometimes be contradictory with WTO agreements; in case of conflict, the WTO Agreements would prevail in court.
CHINA AD/CVD NEWSLETTERS
Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law, Team’s newsletter-EN Vol.2017.09.
CFIUS—WILL INVESTMENT RECIPROCITY BE A NEW REQUIREMENT??
There is movement within the United States to establish investment reciprocity as a criteria in investigations by the Committee on Foreign Investment in the United States into its national security reviews of inbound transactions, a policy shift that would weigh the heaviest on Chinese buyers if enacted.
Investment reciprocity — the idea that the U.S. should block a foreign entity’s investment in a particular industry when a U.S. buyer would be similarly blocked in that entity’s country — has been on politicians’ radar since before Donald Trump took office.
Trump made no secret of his leanings on the campaign trail, criticizing in particular a Chinese investment group’s acquisition of the 130-year-old Chicago Stock Exchange, a deal that has since been cleared by CFIUS.
If the U.S. does decide to go this route, there are at least a couple ways the government could go about it. The President could direct CFIUS to focus more heavily on particular industries or use a broader definition of national security, as long as those directives don’t stray too far from the regulations dictated by the Foreign Investment and National Security Act of 2007, or FINSA. Congress can also amend FINSA to expand either the range of industries susceptible to national security review, or even expand the review itself from one focused solely on national security to a review that more broadly considers foreign investments in the U.S.
CHINESE MILITARY BUILDUP TO PROTECT ITS TRADE INTERESTS???
As mentioned in prior blog posts, there is a close relationship between defense/security and trade. The Japanese attack on Pearl Harbor was created, in part, by the US naval embargo of Japan.
One of the strongest arguments for the Trans Pacific Partnership was the geo-political argument that the TPP would bring us closer to the Asian countries. Former defense secretary Ash Carter stated at one point that the TPP was equivalent to another US aircraft carrier.
On March 15, 2017, Malia Zimmerman for Fox News in an article entitled “China next US threat? Beijing beefs up military to protect trade”, stated:
With a laser-like focus on protecting its lifeblood – trade – China is dramatically altering its military operations, creating specialized teams that can protect its maritime resources, routes and territorial expansion plans. . . .
Harry Kazianis, director of the Washington, D.C.-based Defense Studies for The Center for the National Interest, stated:
“The great Achilles heel of China is trade—especially natural resources that come via sea and into its ports—and a big reason it will inevitably become a globally deployed military power. Beijing’s armed forces are working to slowly but surely reinforce and protect its overseas hubs as well as trade routes that move from Europe, the Middle East and Africa and into China’s territorial waters.”
ZTE HIT WITH SANCTIONS FOR VIOLATING EXPORT CONTROLS ACT
On March 7, 2007, in a notice and judgement, which will be attached to my blog, judgment 3-22, ZTE Corporation Agrees to Plead Guilty and Pay Over $430, the US Justice Department announced that ZTE Corp, has agreed to plead guilty and pay a combined a penalty of $1.1.9 billion for violating U.S. sanctions by sending U.S.-origin items to Iran. As the Justice Department notice states:
ZTE Corporation has agreed to enter a guilty plea and to pay a $430,488,798 penalty to the U.S. for conspiring to violate the International Emergency Economic Powers Act (IEEPA) by illegally shipping U.S.-origin items to Iran, obstructing justice and making a material false statement. ZTE simultaneously reached settlement agreements with the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). In total ZTE has agreed to pay the U.S. Government $892,360,064. The BIS has suspended an additional $300,000,000, which ZTE will pay if it violates its settlement agreement with the BIS. . . .
“ZTE Corporation not only violated export controls that keep sensitive American technology out of the hands of hostile regimes like Iran’s – they lied to federal investigators and even deceived their own counsel and internal investigators about their illegal acts,” said Attorney General Sessions. “This plea agreement holds them accountable, and makes clear that our government will use every tool we have to punish companies who would violate our laws, obstruct justice and jeopardize our national security. . . .”
“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports. The plea agreement alleges that the highest levels of management within the company approved the scheme. ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said Acting Assistant Attorney General McCord. “The enforcement of U.S. export control and sanctions laws is a major component of the National Security Division’s commitment to protecting the national security of the United States. Companies that violate these laws – including foreign companies – will be investigated and held to answer for their actions.”
“ZTE Corporation not only violated our export control laws but, once caught, shockingly resumed illegal shipments to Iran during the course of our investigation,” said U.S. Attorney Parker. “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.”
“The plea agreement in this case shows ZTE repeatedly violated export controls and illegally shipped U.S. technology to Iran,” said Assistant Director Priestap. “The company also took extensive measures to hide what it was doing from U.S. authorities. This case is an excellent example of cooperation among multiple
U.S. agencies to uncover illegal technology transfers and make those responsible pay for their actions.”
The plea agreement, which is contingent on the court’s approval, also requires ZTE to submit to a three- year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program. ZTE is also required to cooperate fully with the Department of Justice (DOJ) regarding any criminal investigation by U.S. law enforcement authorities. . . .”
According to David Laufman, chief of the counterintelligence and export control section at the DOJ’s National Security Division, it was “extraordinarily difficult” to obtain key documents and witnesses located in China until on March 7, 2016, the Commerce decision to add ZTE to the so-called Entity List. According to Laufman, “The game-changing event in this case, was the Commerce Department’s decision to pursue an entity listing of ZTE, demonstrating the efficacy of the whole-of- government approach” to national security.
Companies end up on the Entity List after Commerce determines they are tied to illicit weapons programs, terrorism or other national security threats, and thereafter can’t trade with U.S. companies without a special dispensation from the agency.
This may be the first case in which the Commerce Department has used an Entity List designation to force a foreign company to cooperate in a probe. Commerce will probably start using this strategy in future investigations.
SECTION 337 AND IP CASES
DOMESTIC INDUSTRY FROM PATENT LICENSEE
On March 8, 2017, the US International Trade Commission (“ITC”) issued the attached interesting decision, 2 PAGE ONE PAGE DI, in the Section 337 case Certain Silicon-On-Insulator Wafers. In that decision, the ITC Administrative Law Judge determined that it could find a domestic industry in a Section 337 if the US patent licensee’s activities show domestic activity. Even though the patent holder was a non-practicing entity, the ALJ determined:
Silicon Genesis Corporation (“SiGen”), has established contingently a domestic industry in the United States through the activities of its licensee, SunEdison Semiconductor Limited (“SunEdison”) . . . through its licensee, SunEdison, SiGen has proven by a preponderance of evidence that it has made a significant domestic investment in plant and equipment, in capital and labor, and a substantial investment in research and development to produce certain silicon-on-insulator (“SOI”) products at issue in this Investigation.
The decision did not break new ground, but it reminds nonpracticing entities, (“NPEs”) that one way to meet the domestic industry requirement under Section 337 is through the actions of patent licensee in the United States.
NEW 337 CASES AGAINST CHINA
On March 10, 2017, in the attached ITC notice, Intravascular Sets, Curlin Medical, Inc., Moog, Inc., and Zevex, Inc. filed a section 337 case against imports of Intravascular Administration Sets from Yangzhou WeiDeLi Trade Co., Ltd., China.
If you have any questions about these cases or about Trump and Trade, border adjustment taxes, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.