Instead of entering what many anticipated would be the home stretch of negotiations to end the nearly yearlong trade war, U.S. tariffs on about $200 billion of imports from China are set to increase from 10 percent to 25 percent tomorrow morning. There is plenty of speculation as to what happened, who’s to blame, whether President Trump is engaging in negotiating tactics described in “The Art of the Deal,” and which economy is better situated to withstand a wider, longer trade war (as if a 10 percent economic contraction means victory if the other economy shrinks by 15 percent).
The most prominent explanation for the abrupt reversal is that U.S. negotiators learned that their Chinese interlocutors were backing away from previous commitments to resolve the forced technology transfer problem, which is one of the most important U.S. objectives in these talks. After mulling that development last weekend, Trump opted for escalation. He also promised that the balance of Chinese goods (another $250 billion of imports not yet tariffed) soon will be hit with rates of 25 percent, as well. In response, Beijing announced it will impose yet-to-be-specified countermeasures.
Interestingly, this week’s developments haven’t completely torpedoed the negotiations. A somewhat smaller (than originally planned) delegation of Chinese officials is in Washington for negotiations slated to begin at 5pm, which gives them exactly 7 hours to sort everything out before Trump’s higher tariffs take effect at the stroke of midnight. Don’t expect a comprehensive deal or even the contours of one to materialize, but with Chinese Vice Premier Liu He making the trip to Washington despite this latest upheaval, there is at least some hope that the actual tariff escalation will be deferred.
It turns out that the fine print in the Federal Register notice announcing the new rates states that products leaving China after 12:01, Friday, May 10, will be subject to the higher tariffs. It takes about two weeks for a cargo ship departing Shanghai to arrive in Long Beach, so negotiators really have seven hours, plus about two weeks, to reach a deal before Customs has to tax U.S. importers at the new, higher tariff rate. Of course, time is much shorter (seven hours plus about twelve hours!) for importers of high-value, fragile, and perishable products, which are typically transported by air.
As of this moment, the United States has punitive tariffs in place on approximately $250 billion of imports from China. Since last July, tariffs of 25 percent have been levied on imports that were valued collectively at about $50 billion in 2017. Nearly all of those goods are intermediate inputs or capital equipment—the purchases of U.S. producers. Trump advisor Peter Navarro was pleased to note at the time that, in selecting the products to target, he and colleagues used a special economic model to help them avoid burdening consumers by focusing on business purchases, as if businesses don’t pass their higher costs onto consumers in the form of higher prices or onto to their shareholders and workers in the form of lower profits. Thanks, Pete!
After Beijing retaliated, the Trump administration imposed 10 percent tariffs on an additional $200 billion of Chinese goods. This time, the majority of targeted products were consumer goods. It is this tranche of products for which tariffs are slated to increase to 25 percent at midnight. Makes one pine for the days when Navarro worried about consumers.
If matters aren’t resolved quickly, the likelihood is very high that all U.S. goods imports from China will be hit with tariffs of 25 percent. Let me try to put that in some perspective.
In 2017 (before the punitive tariffs were in place), U.S. imports from China totaled $504 billion and duties paid to U.S. Customs amounted to $13.5 billion, which is an average applied tariff rate of 2.68 percent. Last year, when tariffs of 25 percent on $50 billion of Chinese goods were imposed in June and July, and additional tariffs of 10 percent on $200 billion of Chinese goods were imposed in late September, the value of imports from China totaled $543 billion and the duties collected came to $23 billion—an average applied tariff rate of 4.23 percent. Nearly $10 billion of costs associated with the higher tariffs were imposed on consumers, businesses, shareholders, and employees.
It turns out that for many products Americans purchase from China, demand is fairly price inelastic. In other words, a one percent increase in price generates less than a one percent decline in quantity demanded. Total revenue rises. At least that is the case for broad swaths of products within the range of price increases attributable to the tariffs. Afterall, despite that tariffs, import value rose from $504 to $543 billion in 2018. Maybe there aren’t many substitute sources or the costs of finding substitutes and switching is too high relative to the tariffs.
A 25 percent across-the-board tariff could generate different effects. Demand may be more price elastic for more products at that price range. In other words, we will likely see a decline in import value from China if 25 percent tariffs are imposed. That means that the added costs directly attributable to the tariffs would not be 25 percent of $543 billion (the 2018 value), for example, because the value of imports will be lower. How much lower depends on these elasticities and other factors. However, 25 percent of $543 billion is not an unreasonable, upper end estimate of the costs to U.S. consumers and businesses that would be attributable to a 25 percent across the board tariff. That’s $135 billion. That’s a cost of about $400 for every person in the United States. That’s a lot.
The future of multilateral trade has presented some vexing questions for policy watchers over the past few years. With the Doha Round of multilateral trade negotiations hopelessly stalled and the proliferation of regional and bilateral agreements in its stead, contemplation and debate about the fate of the World Trade Organization, its successful adjudicatory body, international trade governance, and globalization have been all the rage.
December continues to shine a particularly bright light on these issues, as U.S. and EU negotiators are in Washington this week discussing the proposed bilateral Transatlantic Trade and Investment Partnership. Last week, negotiators from the United States and 11 other nations met in Singapore in an effort to advance the regional Trans-Pacific Partnership deal. The week prior, representatives of 159 WTO members were in Bali, Indonesia for the Ninth Ministerial Conference (MC-9), where a multilateral agreement was reached on a set of issues for the first time in the WTO’s 19-year history.
The significance of the Bali deal depends on whom you ask. Those heavily vested in the current architecture of the multilateral system tend to hail Bali as proof that multilateral negotiations are back in business and that there is renewed promise for completing the long-stalled Doha Round. Frankly, taking 12 years to forge an agreement on trade facilitation (basically, reform of customs procedures, which constitutes a tiny fraction of the Doha Round’s objectives) plus some concessions to permit more subsidization of agriculture in the name of food security is not exactly convincing evidence that Doha Round negotiators have demonstrated their cost effectiveness or the utility of this approach.
The most enlightening (and liberating) conclusion from Bali is that the agreement killed the Doha Round. By peeling off the trade facilitation negotiations and reaching agreement, Bali circumvented what has been, arguably, one of the greatest obstacles to the Doha Round’s success: the commitment of negotiators to the "single undertaking," which pledges that "nothing is agreed until everything is agreed."
With Bali a direct hit on that unwieldy concept, WTO negotiators are free to take-up Doha Round issues in other, more manageable fora, thus liberating governments to pursue global trade barrier reduction in myriad new ways. Why not have a series of mini-rounds and pursue fewer issues at a time by matching negotiations on, say, agricultural and industrial liberalization? Or by matching talks on services with talks on rules, like antidumping? Yes, there need to be adequate tradeoffs in a world of reciprocity-based trade agreements, but the notion that everything needs to be on the table to accomplish those tradeoffs has been rendered quaint--if not inutile--by the changing composition and interests of the WTO membership. If particular governments are the problem, why not pursue more plurilateral deals? Why not establish a mechanism in the WTO through which demonstrably successful provisions from the universe of existing and brewing bilateral and regional agreements can be adopted as best practices by taking up these issues and voting on an annual basis? These approaches could facilitate liberalization and give the WTO new credibility.
But Bali doesn’t only offer guidance to WTO negotiators. Before U.S. and EU negotiators get too far along--where they are near certain to get stuck in the deep mud created by trying to resolve dozens of highly contentious and highly technical issues on "one tank of gas"--they should consider the alternative of taking the negotiations in smaller bites. Despite the original announced deadline of 2014, negotiators are quietly acknowledging that projection is overly ambitious. But so too are 2015, 2016, and 2017. There are simply too many issues on the table and too much suspicion that local autonomy over traditionally domestic matters is up for bargaining that the amount of time needed for public debate has been vastly underestimated. Meanwhile, it is unclear that government’s can stay committed to the TTIP agenda if it drags on for several years.
This short paper explains in greater detail the rationale for breaking the TTIP up into three, two-year negotiations that yield three successive agreements. The ideas conveyed are certainly bound to raise objections and even scorn. But by exposing the single undertaking as an obstacle to liberalization, the Bali Agreement has some lessons that TTIP negotiators would be wise to understand.
Still doubt that the Church of Universal Coverage is a bona fide religion? Consider:
- The American people have been solidly against the Democrats' universal-coverage plan since July 2009.
- Roughly 60 percent of the public wants Congress to scrap that legislation and start over.
- President Obama will nevertheless use that legislation as the starting point for negotiations with Republicans at next week's health care summit.
Mmmm, that's good fervor.
Republican summiteers shouldn't spend too much time discussing their own ideas -- which aren't going anywhere, and really aren't that great anyway -- lest they unwittingly aid Democrats in changing the below-illustrated narrative. They should instead focus like a laser beam on the dangers of the Democrats' legislation, and how dangerously close it is to becoming law.
Then they can all return to the drawing board and come back with better ideas.
The Hill's Congress blog has a regular series that provides policy experts a forum to discuss current topics of the day. This week, the editors posed this question:
President Obama has taken a very different approach to diplomacy than President Bush. Does the new approach serve or undermine long-term U.S. interests?
What “very different approach?” Sure, President Bush implicitly scorned diplomacy in favor of toughness, particularly in his first term. But he sought UN Security Council authorization for tougher measures against Iraq; a truly unilateral approach would have bombed first and asked questions later. By the same token, President Obama has staffed his administration with people, including chief diplomat Hillary Clinton and UN Ambassador Susan Rice, who favored military action against Iraq and Serbia in 1998 and 1999, respectively, and were undeterred by the UNSC’s refusal to endorse either intervention.
There are other similarities. George Bush advocated multilateral diplomacy with North Korea, despite his stated antipathy for Kim Jong Il. President Obama supports continued negotiations with the same odious regime that starves its own people. Bush administration officials met with the Iranians to discuss post-Taliban Afghanistan and post-Saddam Iraq. In the second term, President Bush even agreed in principle to high-level talks on Iran’s nuclear program. President Obama likewise believes that the United States and Iran have a number of common interests, and he favors diplomacy over confrontation.
This continuity shouldn’t surprise us. Both men operate within a political environment that equates diplomacy with appeasement, without most people really understanding what either word means. Defined properly, diplomacy is synonymous with relations between states. As successive generations have learned the high costs and dubious benefits of that other form of international relations -- war -- most responsible leaders are rightly eager to engage in diplomacy. Perhaps the greater concern is that they feel the need to call it something else.
Cato foreign policy experts weigh in on President Obama's record in his first 100 days:
Christopher Preble, Director Foreign Policy Studies:
President Obama deserves credit for making a few modest changes in U.S. foreign and defense policy, and he has signaled a desire to make more fundamental shifts in the future. Some of these may prove helpful, while others are likely to encounter problems. In the end, however, so long as the president is unwilling to revisit some of the core assumptions that have guided U.S grand strategy for nearly two decades -- chief among these the conceit that the United States is the world's indispensable nation, and that we must take the lead in resolving all the world's problems -- then he will be unable to effect the broad changes that are truly needed.
Ted Galen Carpenter, Vice President Defense & Foreign Policy Studies; Christopher Preble:
On the plus side, Obama moved quickly to fulfill his most important foreign policy promise: ending the war in Iraq. That said, the policy that his administration will implement is consistent with the agreement that the outgoing Bush administration negotiated with the Iraqis. Given that the war has undermined U.S. security interests, and our continuing presence there is costly and counterproductive, Obama should have proposed to remove U.S. troops on a faster timetable.
Malou Innocent, Foreign Policy Analyst:
The jury is still out on the other major, ongoing military operation, the war in Afghanistan. That mission is directly related to events in neighboring Pakistan, which is serving -- and has served -- as a safe haven for Taliban supporters for years. President Obama deserves credit for approaching the problem with both countries together, and also in a regional context, which includes Iran, as well as India. Still unknown is the scope and scale of the U.S. commitment. President Obama has approved a nearly 50 percent increase in the number of U.S. military personnel in Afghanistan. Some have suggested that still more troops are needed, and that these additional troop numbers might prevail for 10-15 years. That would be a mistake. The United States should be looking for ways to increase the capacity of both Afghanistan and Pakistan to confront the extremism in their countries, and should not allow either to grow dependent upon U.S. military and financial support.
Christopher Preble and Ted Galen Carpenter:
On Iran, President Obama made the right decision by agreeing to join the P5 + 1 negotiations, but that is only a first step. The two sides are far apart and President Obama has not signaled his intentions if negotiations fail to produce a definitive breakthrough. Sanctions have had a very uneven track record, and are unlikely to succeed in convincing the Iranians to permanently forego uranium enrichment. If the Iranians are intent upon acquiring nuclear weapons, military action would merely delay Iran ’s program, and would serve in the meantime to rally support for an otherwise unpopular clerical regime, and a manifestly incompetent president.
Doug Bandow, Senior Fellow; Christopher Preble:
A related problem is North Korea's ongoing nuclear program, an area where the president and his team seem to be grasping for answers. President Obama was mistaken if he believed that that the UN Security Council would render a meaningful response to Pyongyang's provocative missile launch. It was naive, at best, for him to believe that even a strong rebuke from the UNSC would have altered Kim Jong Il's behavior. The president must directly engage China, the only country with any significant influence over Kim. The North's reckless and unpredictable behavior does not serve Beijing's interests.
Benjamin Friedman, Research Fellow; Christopher Preble:
Obama and Defense Secretary Robert Gates are correct to apply greater scrutiny to bloated Pentagon spending, and to terminating unnecessary weapon systems, but the budget will actually grow slightly, at a time when we should be looking for ways to trim spending. If President Obama decided to avoid Iraq-style occupations, we could cut our ground forces in half. If we stopped planning for near-term war with China or Russia, the Air Force and Navy could be much smaller. Unless we commit to a grand strategy of restraint, and encourage other countries to provide for their own defense, it will be impossible to make the large-scale cuts in military spending that are needed.
Jim Harper, Director of Information Policy Studies; Benjamin Friedman; Christopher Preble:
Two other quick points. President Obama has moved away from some of the overheated rhetoric surrounding counterterrorism and homeland security, including dropping the phrase ‘War on Terror”. This was the right approach. The language surrounding the fight against terrorism is as important -- if not more important -- than the actual fight itself. Equally useful is his pledge to close the detention facility at Guantanamo Bay and his renunciation of the use of torture and other illegal means in the first against al Qaeda. These steps send an important message to audiences outside of the United States who cooperation is essential.
Ian Vasquez, Director, Center for Global Liberty & Prosperity; Juan Carlos Hidalgo, Project Coordinator for Latin America.
President Obama has signaled a slight change on US-Cuba policy by softening some travel and financial restrictions. It is not as far as we would have liked, but it is a step in the right direction -- toward greater engagement, as opposed to more isolation, which was the approach adopted by the Bush administration.
For more research, check out Cato's foreign policy and national security page.
The designation of Hezbollah as a terrorist group by Egypt highlights a fault line developing in the Middle East over relations with Israel and the United States.
On the one hand, there are those who favor negotiations to resolve the dispute between Israel and the Palestinians. These countries include, most prominently, Egypt and Jordan, which both have signed treaties with Israel. Saudi Arabia also has promoted a negotiated solution.
Iran and Hezbollah, on the other hand, have emphasized what they call "resistance," which means the use of arms to wrest territory from Israel 's control. The admission by Hezbollah's leader, Hassan Nasrallah, that one of the people Egypt arrested was supplying arms to Hamas on Hezbollah's behalf indicates that Hezbollah's "resistance" is not limited to Lebanese sovereign territory.
Although Egypt's action is directed against Hezbollah (and, by extension, Iran), it also carries a warning for the United States and Israel. The "resistance" argument is gaining ground in the Middle East. If it is to be successfully countered, negotiations need to deliver something tangible for the Palestinians—and soon. Otherwise, the regional governments who favor negotiation will find their arguments undercut, which could not only jeopardize hopes for Middle East peace, but might also threaten their own stability.