Focus
August 16, 2019 | 13:41
A Viewer’s Guide to America’s Global Trade War
A Viewer’s Guide to America’s Global Trade War |
The U.S./China trade war escalated again in the past couple weeks, with the Trump Administration announcing a 10% tariff on all remaining imports from China (some of which was subsequently postponed) along with other measures, and with China retaliating by cancelling all remaining agricultural orders from the U.S. (also along with other measures). This latest flurry of tit-for-tat actions marked the sixth round of escalation in a trade war that began in earnest with the imposition of U.S. tariffs on Chinese solar panels in January 2018. But, it actually started as soon as President Trump took office a year earlier with stepped-up anti-dumping and countervailing duty investigations, along with commencing other investigations that laid the groundwork for tariffs. |
Why a Trade War?The U.S. goods and services trade deficit totalled $651 billion in the year ended June 2019, representing 3.1% of average GDP (Chart 1). Interestingly, the trade shortfall has remained at a relatively stable share of GDP since early 2013, in a narrow 2.7%-to-3.1% range. Before the Great Recession (2006 Q3), the four-quarter deficit hit a record $778 billion or 5.7% of GDP. Although the total trade deficit has been relatively stable for six years, the stability masks extreme moves in the shortfall’s components. The U.S. ran a near-record $249 billion surplus in services trade in the latest year (1.2% of GDP) with a record $899 billion deficit in goods trade (Chart 2). The latter, as a share of GDP (4.3%), was still not as bad as 2006’s nadir (6.2% in Q3). However, accounting for the steady improvement in the petroleum goods trade shortfall, the balance of trade in non-petroleum goods is currently at a record deficit both in dollar terms and relative to GDP. Meanwhile, the goods trade deficits with China (45% of the total) and the EU (20%) have been trending wider (Chart 3). Although there are net gains from trade, the benefits tend to be diffuse while the costs tend to be concentrated. Unfortunately, with woefully inadequate trade adjustment programs and some partners trading unfairly (which the Administration argues is particularly the case for China), the mounting goods trade deficit has corresponded with a lengthening list of trade casualties that increasingly has become a social and political problem. The response was President Trump’s “Putting America First” trade policy agenda. A key item on the agenda, and the primary weapon in the trade war, is “aggressive enforcement of U.S. trade laws”. How the War’s Been WagedAntidumping and countervailing duty (AD-CVD) investigations determine whether there are unfair trading practices such as foreign companies selling below cost or being subsidized that are causing injury to U.S. companies. Since January 2017, there have been 179 AD-CVD investigations initiated, a 231% increase from the comparable period in the previous administration. The vast majority of these investigations end up with affirmative determinations (the duties are set by the degree of dumping and/or subsidization), and Chinese companies are among the most cited. Interestingly, AD-CVD investigations are typically petitioned by a company or group of companies, but in November 2017, for the first time in over 25 years, the government itself petitioned an AD-CVD case concerning Chinese common alloy aluminum sheet, a testament to the Administration’s more aggressive approach. |
Another testament is the dusting off of infrequently-used trade remedies, the investigations for which are named after the section number in their enabling legislations. Section 201 (Trade Act of 1974) investigations determine whether surging imports are causing injury to a domestic industry. Unfair trading practices do not have to be determined as this is a “safeguard” trade remedy. Section 232 (Trade Expansion Act of 1962) investigations determine whether increased imports are a threat to national security. Section 301 (Trade Act of 1974) investigations determine whether a country is systemically engaging in unfair trade practices. Affirmative determinations give the President lots of leeway with respect to the size and timing of tariffs along with other non-tariff measures, which Mr. Trump has been exploiting. Round 1: Section 201 tariffs on solar panels (30%) and washing machines (20%-50%) were imposed on January 22, 2018. Although global tariffs, the solar panels were mostly Chinese and the washing machines were mostly Korean. Following international trade law, the tariffs are in place for three years before being phased out, and there was no retaliation. Interestingly, Samsung and LG were setting up U.S. production facilities as these tariffs were coming into force (the consequence of trade battles with the Obama Administration). They, along with Whirlpool who was also expanding production, subsequently raised their prices (and on dryers too!). A recent study showed that because of the tariffs, 1800 new jobs were created and consumers paid an additional $1.5 billion for their laundry equipment, which is about $820,000 per job. Tariffs, like any tax, are a net drag on the economy, but the benefits tend to be concentrated while the costs tend to be diffuse – the opposite of the net gains from trade. As such, one can appreciate the political expediency of tariffs. Round 2: Section 232 tariffs on steel (25%) and aluminum (10%) were imposed on March 23, 2018. These were global tariffs, although some countries were given extensions until late spring. Not buying the “threat to national security” argument, many steel and aluminum exporters eventually retaliated in kind including Canada, China, the EU, India, Mexico and Turkey. After agreeing to quotas, Argentina, Australia, Brazil and South Korea were exempted. The tariffs were eventually taken off Canada and Mexico to facilitate local passage of the USMCA, and their respective retaliatory measures were reversed. Round 3: Section 301 tariffs (25%) on $50 billion of Chinese goods were imposed in two waves (July 6 and August 23, 2018), after the March 22 release of the investigation which determined that “numerous acts, policies, and practices of the government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory, and burden or restrict U.S. commerce.” There were also restrictions placed on Chinese investment in the U.S. tech space. China retaliated with 25% tariffs on $50 billion of U.S. goods, heavily skewed to agricultural products. Round 4: 10% tariffs on another $200 billion of Chinese goods were imposed on September 24, 2018, along with the announcement that they would increase to 25% on January 1, 2019. China retaliated with 5%-10% tariffs on $60 billion of U.S. goods and by cancelling some agricultural orders. After a Trump-Xi meeting on December 1, 2018, the tariff hike was postponed until March 1, 2019 and then indefinitely to allow time for trade talks to progress. Round 5: The tariffs were lifted from 10% to 25% on May 10, 2019. The move came after an agreed-on 150-page trade deal draft came back from Beijing 45 pages lighter. Then, on May 15, the U.S. Bureau of Industry and Security (BIS) announced that Huawei Technologies and its affiliates would be added to its “Entity List”. This meant that the sale or transfer of American technology to Huawei would require a BIS-issued license that could be denied if the transaction is deemed harmful to U.S. national security or foreign policy interests. China retaliated by lifting its tariff range on $60 billion of U.S. goods to 5%-25%, cancelling some more agricultural orders, and establishing its own blacklist of U.S. companies. Round 6: Because of the lack of progress on trade talks after his meeting with President Xi on June 28, 2019, President Trump announced, on August 1, that a 10% tariff on all remaining imports from China would be imposed on September 1. Given the latest trade figures, this would be about $260 billion worth of goods. Then, after China permitted its managed exchange rate to trade above 7 yuan per U.S. dollar, the weakest level since 2008, the Trump Administration designated China as a “currency manipulator”. It also announced that U.S. government agencies were banned from buying equipment from Huawei (already on the “Entity List”) and other Chinese tech firms. In retaliation, China announced that it was cancelling all remaining agricultural orders from the U.S. and could restrict exports of rare earth minerals to the U.S. With tariffs already on $110 billion of U.S. goods, and U.S. exports to China having slipped from a record-high 12-month tally of $135 billion in July 2018 to just $108 billion by June 2019, China didn’t have much room left to tariff additional U.S. goods. Afterwards, on August 13, the Administration announced that the 10% tariff would be postponed until December 15 for the majority of items. The Wall Street Journal estimated (based on 2018 data) that only about $107 billion worth of goods would face tariffs in September with the remainder ($156 billion) postponed until December. The “currency manipulator” label is more symbolic than substantive. True, Treasury Secretary Mnuchin can now engage with the IMF “to eliminate the unfair competitive advantage created by China's latest actions”. But with the IMF concluding last month that it saw the Chinese currency (in 2018) “as broadly in line with medium term fundamentals and desirable policies, i.e. not significantly over or undervalued”, and with the U.S. about to impose tariffs on virtually all imports from China, Mr. Mnuchin might not get much engagement. We suspect part of the motivation for the designation was to further legitimize current and prospective trade actions against China. Note that on May 23, 2019, the Commerce Department proposed changing countervailing duty investigations to include “currency subsidies”. What’s Next for “Tariff Man”?There are three trade issues the Trump Administration must deal with in the months ahead, with the potential to escalate the global trade war further. First, the postponed 10% tariff on all remaining imports from China is scheduled for December 15. Second, the report on the Section 232 investigation into imported vehicles and parts is scheduled for release by November 13. On May 17, 2019, President Trump said the investigation determined that imported vehicles and parts were a threat to national security, but the report’s release was postponed for 180 days. Publication would have set a countdown clock to take remedial action, and the Administration wanted to use the threat of tariffs as leverage in trade talks with the EU and Japan. Note these could be global tariffs, so other countries like South Korea might be impacted as well. Canada and Mexico are exempt, which holds even if Congress hasn’t yet ratified the USMCA. Third, the U.S.-EU trade dispute over Airbus-Boeing subsides is going to heat up. In separate cases over the past couple years, the WTO has determined that both Airbus and Boeing receive unlawful subsidies. However, the U.S. case against the EU came first, and, later this year, the WTO is expected to rule on the amount of countermeasures the U.S. can impose. If the U.S. goes ahead with tariffs, the EU has said it will retaliate. Both sides have already published the list of goods they intend to impose tariffs on. How will the Administration deal with these trade issues, along with any new ones that might pop up in the interim? It’s anybody’s guess. But, on top of all the protectionist measures currently in place (and some have yet to fully work their way through the economy), any additional trade restrictions in the months ahead could prove to be an unbearable weight for the U.S. and global economies. |