US trade policy: Ready, aim...

Washington makes more preparations to hit China on trade in the first half of next year.
Judge, jury and executioner

Earlier this week, the Trump Administration ‘self-initiated’ an anti-dumping investigation into imports of sheet aluminium from China. Although the procedure, announced by and carried out under the auspices of the Department of Commerce, is perfectly legitimate under US rules, this was the first time since 1985 that an anti-dumping investigation has been launched by a US Administration without there being a request for such from industry (although Commerce Secretary Wilbur Ross has been at pains to note that his department work with the relevant industry association in building the case). That case was brought against Japan over the alleged dumping of semi-conductors at a time of heightened trade tensions inflamed in significant part by one of the obsessions of the current President, Donald Trump, ie a bilateral US trade deficit. Imports of sheet aluminium to the US from China were worth around USD600 million last year.

Furthermore, the Department of Commerce has launched a parallel case alleging that China is also illegally subsidising sheet aluminium production, the first self-initiation of this sort since a 1991 Canadian lumber case.

Weight may be added to the Department’s case if and when the results are forthcoming of a controversial investigation launched in the spring into whether imports of aluminium and steel from China are undermining US national security. According to recent press reports, officials claim that announcements will be made in January.

Expert opinion is that, by bringing cases itself which it will judge itself, the Commerce Department has put to one side totally the pretence that its role in such processes is quasi-judicial and technical. Indeed, in my opinion, the move is a blatantly political response to increasing pressure on Mr Trump to start fulfilling his populist pre-election pledge to cut China in particular down to size on trade.

In the light of these developments, I think it time to update on my 22 October article.

Alongside these latest steps we need to recall two more already under way, the first of which was addressed in that article, ie the USTR’s Section 301 investigation (on which the US also sets itself up as judge, jury and executioner) into alleged barriers to market access confronting US firms looking to do business in China. The outcome is expected to be announced not long into 2018. USTR Robert Lighthizer is more or less sure to find Beijing guilty as charged and will probably recommend punitive tariffs against some imports from China in the hope (expectation?) that China will respond as Japan did in the face of Section 301 actions in the 1980s by allowing itself to be coerced into managed trade agreements. However, President Xi Jinping is much more likely, in my view, to batten down the hatches, take the US to the WTO and retaliate against US exports to China, probably starting with politically highly sensitive farm products (eg beef, chicken, pork, soya). Escalation by both sides is likely to follow, including Mr Trump’s longed for measures against Chinese steel which would also hit EU in the face of clear warnings from the European Commission that it too would retaliate against imports from the US.

Second, Congress’s consideration of new legislation to tighten the rules on foreign investment in the US in the interests of national security, also patently aimed significantly at Beijing.

Putting all this together, it is hardly surprising that the economic nationalists, rallied by ex-White House top aide Stephen Bannon (pictured), believe that the trade war they hope for with China is now fast approaching.

Steeling for a scrap

On the Section 301 action, USTR Robert Lighthizer is more or less sure to find Beijing guilty as charged and will probably recommend punitive tariffs against some imports from China in the hope (expectation?) that China will respond as Japan did in the 1980s by allowing itself to be coerced into managed trade agreements. However, President Xi Jinping is much more likely, in my view, to batten down the hatches, take the US to the WTO and retaliate against US exports to China, probably starting with politically highly sensitive farm products (eg beef, chicken, pork, soya). Escalation by both sides is likely to follow, including Mr Trump’s longed for measures against Chinese steel which would also hit EU in the face of clear warnings from the European Commission that it too would retaliate against imports from the US.

Why now?

So, why has the ever-approval rating conscious and fundamentally protectionist Mr Trump waited almost a year before really getting to grips with his trade agenda?

First, he has discovered that the trade paradigm is far from black and white. On NAFTA, for example (more of which below), scrapping it, as he committed to do before the election, would certainly appeal to those who voted for him in America’s rust-belt; but it would severely damage his support in farming states which have benefited hugely economically from the agreement and which he also needs to win to stand any chance of a second term in 2020. And on steel tariffs, he has discovered that there is a powerful US manufacturing lobby which remains competitive globally largely thanks to relatively cheap imports from China and which is also scared that tariff imposition on such imports could trigger retaliation against its exports; furthermore, the highly competitive US mini-mills are generally opposed to tariffs on steel imports because they too are scared of retaliation by their export markets. So, it has taken time for the economic nationalists around him (notably Peter Navarro) to come up with approaches which they hope will square the circle.

Second, Mr Trump has discovered that failing to live up to his pre-election promises is not good for his already challenging approval ratings. Contrariwise, when he delivers on pre-election pledges it helps to shore up his base. Thus, hitting China on trade can only be good — at least initially until Trump voters get hit by the inevitable consequences to their wallet on tariffs on imports from China — for a metric he cares about above all others, ie his personal standing in the polls. With his ratings stuck around historic lows for this stage of a first-term presidency he urgently needs to shore up his base by keeping to his word on trade.

Third, Mr Trump appears to have held back on tackling China on alleged unfair trade practices because he wanted Beijing to assist in trying to rein in North Korea over its nuclear programme. However, as this week’s ground-breaking missile test suggest, President Xi Jinping is either unable (in my view) or unwilling to deliver on this count.

Fourth, it was long my view that — given the greater degree of ‘orthodox’ thinking on trade in Congress, especially among Republicans — Mr Trump would look to push through tax reform before se riously pursuing his trade agenda, rather than put the former at risk by engaging in a major battle with his own party over the latter. This still looks to be the case even though it is, as yet, by no means clear that tax reform will pass this year — or even, symbolically very importantly, before 20 January 2018 when Mr Trump begins his second year in office. But if, as I expect, he comes under yet more pressure domestically in the new year over a range of issues (including Robert Mueller’s investigation into Russian interference in the US election), he is likely to pursue steps which both distract from his troubles and shore up his base. Beating up China over trade fits the bill perfectly.

NAFTA: Fighting on two fronts

Similarly, Mexico. But another of those ‘issues’ which are proving problematic for the President is the NAFTA renegotiation.

The fifth round of talks held last month seems to have gone marginally better than the fourth in terms of atmospherics at least; but there seems to have been little, if any, progress on substance. The three parties are due to meet again in Washington this month and in Montreal in January; but the revised deadline for completion of the process of end-March is moving ever closer without any sign of a breakthrough. Indeed, if anything, Canada and Mexico seem increasingly to be finding common cause to resist US proposals which they have, respectively, described as “extreme” and “unworkable”.

Especially with Mexico’s elections now just seven months away, I see no cause for optimism and anticipate that Mr Lighthizer will have to confess to Mr Trump early in the new year that the process has, to all intents and purposes, stalled totally. Despite the damage it would do to his standing in farming states, the President may then be tempted to give notice of US withdrawal from the agreement; but, as I explained in an article published in early September, it is far from clear that he can actually follow through on this as it appears to be Congress’s prerogative. What he can — and may well in these circumstances — do, however, is slap border tariffs of up to 15% on any and all imports from Canada and Mexico for up to six months without Congressional approval, a move which would appeal to much of his base but would risk triggering trade wars on two fronts simultaneously.

The “stealth war”

Then there is what the Washington Post has referred to as Mr Trump’s stealth war on trade, ie his attempt to undermine the World Trade Organisation’s (WTO) dispute settlement mechanism by blocking the appointment of replacement judges on its appellate body. The fact that the US has a higher ‘win’ rate than any other major user of the mechanism seems either to have passed Mr Trump by or to suggest that nothing less than a 100% win rate is good enough. To be fair to Mr Trump, Barack Obama also blocked appointments for some time; but he set that to rights shortly before he left office. So far, though, the current President has shown no sign of changing his stance — indeed, quite the contrary. The seven person panel is now down to five and will be reduced to four, the minimum to allow it to function, at the end of this month; by September 2018 it will be three and effectively hors de combat.

So, is a trade war inevitable?

The short answer is that it isn’t. But I certainly expect the current ‘phony war’ to come to an end in early 2018 as the first shots in earnest are fired by the Trump Administration. Where we go from there is, as yet, unclear; but, although a trade war is not inevitable, in my view, the risk of an escalation into something serious is far from negligible especially if Mr Trump succeeds in destroying the WTO dispute settlement mechanism.

Alastair Newton

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