Tag: war

A Trade Armistice in the Works?

President Trump set off another round of Twitter hyperventilation and financial market selling these past 18 hours with his latest threat to assess duties on another $200 billion of Chinese imports. What to make of this?

I see two (and only two) ways of looking at this. You can conclude that Trump is irrational, engaging in rhetoric and taking actions that are inconsistent with his goals, or you can see him as rational. You may not like his goals, but that doesn’t make him irrational.  And he may be rational, but that doesn’t mean he’s not misguided.  It seems to me, though, that if you think Trump’s irrational, then there’s not much use in trying to make heads or tails of the daily gyrations. There’s no basis, really, for offering much in the way of useful analysis of U.S. trade policy for the next couple of years.

I see Trump as rational, but deeply misguided. His unpredictability is risky and frustrating, but it’s also a staple of his governance. Unpredictability is the most predictable feature of this administration. But Trump’s goal is consistent and predictable.  Trump’s goal is to cut deals that make him look Herculaean. The deals he most covets are those that cast him as fixing the trade problem with China and fixing the “worst trade deal ever negotiated,” NAFTA.

From the outset, Trump set his sights on “fixing” the U.S. bilateral trade deficit with China.  Is that a worthwhile priority of trade policy?  Absolutely not. But Trump is convinced that reducing the deficit is priority number one.  He sees his high stakes engagement as worthwhile because he miscalculates the potential benefits and costs of his approach. I see the upside of Trump’s approach as offering potentially smallish benefits (getting China to do something that may benefit U.S. exporters), but the downside (a deleterious trade war that leaves the world in far worse shape) as severe and significant. My own approach would be far more risk-averse.

Trump wants the Chinese to buy more American goods and services.  On its face, this is a reasonable desire for a U.S. president to have.  But Trump wants the Chinese government to commit to purchasing more U.S. goods and services, somewhere in the neighborhood of $100 billion to $200 billion per year (which, of course, reinforces the fact that China’s economy is centrally directed, which is the basis for the legitimate problems in the economic relationship in the first place.) Threatened tariffs of 25 percent on $50 billion of imports from China, announced as result of a U.S. investigation into Chinese technology and IP practices, are Trump’s initial leverage in getting the Chinese to commit to more purchases. Beijing’s announced retaliation slightly negates that leverage, but then the administration cracked down on ZTE, the Chinese information and communications technology company that admittedly violated U.S. export control laws by selling certain products to Iran and North Korea, and was cut off from U.S. suppliers of semiconductors and other critical components.

The on-again-off-again-on-again sanctions seem to be conditioned on whether and to what extent Beijing commits to purchasing U.S. exports, and that decision now seems to be conditioned upon Trump granting a reprieve to ZTE. Trump has already given ZTE a reprieve on paper (with certain conditions and requirements), but Congress seems to have strenuous objections, and is considering an amendment to the defense authorization bill to prevent Trump’s reprieve from taking effect.

Trump’s latest threat to hit another $200 billion of Chinese products with tariffs is just as much a threat to Congress as it is to China.  Either the Chinese will relent and agree to purchase U.S. stuff (without need of reinstating ZTE) and the tariffs will be called off or Congress, fearing (more than Beijing does) a trade war that will take down U.S. manufacturing and agricultural interests and their representative in Washington, will relent on its legislative push to block ZTE.  Of course, relenting on ZTE while continuing to treat Canada, Mexico, the EU and other allies as national security threats (especially since that designation has resulted in those countries applying tariffs to U.S. agricultural and manfuacturing exports, too) isn’t going to sit well with Congress either. 

So, in order to fix these asymmetries and make Congress and U.S. allies whole (wholer, whole-ish): Congress abandons its legislation to block ZTE, which gets back in business (with conditions); the U.S.-China tariff war is called off; China signs purchasing orders for $100 billion to $200 billion of U.S. exports; the steel and aluminum tariffs on Canada, Mexico, and the EU are removed; and the NAFTA negotiations are restarted and concluded before the midterms. This gives Trump two major pyrrhic victories that will reinforce his greatness to his base.

Seems to me these are the only outcomes that could remotely explain (if not justify) the ride Trump is taking us on. I see it as misguided, but not irrational.

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Will Tariffs Consume the Tax Reform Benefits U.S. Manufacturers Were Expecting?

Former White House economist Gary Cohn expressed concerns yesterday that Trump’s tariffs would erode the benefits from tax reform. Since the on-again-off-again 25 percent tariffs on imports from China are—as of 3:23pm, Friday, June 15, 2018—“on again,” let me share this back-of-the-envelope analysis that shows why Cohn’s concerns are justified.

Certainly, the additional profits expected from the reduction in corporate rates from 35 to 21 percent could be entirely wiped out for the manufacturing sector. In 2017, according to Census Bureau data, the pre-tax profits of the U.S. manufacturing sector were $691 billion.  At 35 percent, the taxes on paper would be $242 billion.  At 21 percent, the average tax bill is $145 billion.  So, roughly speaking, the reduction in rates is estimated to be worth about $97 billion in terms of 2017 profits.

Well, in 2017, the value of U.S. goods imports was $2.33 trillion. Commerce Department data show that half of that value was comprised of intermediate goods (raw materials, production inputs, capital equipment)—the purchases of producers, not households. In other words, approximately $1.17 trillion of imports are U.S. costs of production.

If a tariff of, say, 10 percent were imposed on these imports, the cost of production for manufacturers would rise, roughly speaking, by $117 billion. That’s a $117 billion reduction in profits. Meanwhile, assuming foreign governments responded in kind and hit U.S. exports with 10 percent tariffs, manufacturing revenues also would take a hit.  U.S. exports of manufactured goods in 2017 amounted to $1.24 trillion.  Again, roughly speaking, that 10 percent tariff would reduce U.S. manufacturing revenues by $124 billion.  That, too, reduces profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits (a 35 percent reduction in manufacturing’s 2017 pre-tax profits). So, ceteris paribus, a 10 percent across-the-board tariff would reduce the U.S. manufacturing sector’s profits by about 35 percent.  With that kind of “downturn” in profitability, from where would the resources come to make capital investments, build new production facilities and R&D centers, and to offer new employment opportunities?

Let’s apply this ball park estimate to the actual situation on the ground. The tariffs Trump has already imposed or announced (steel and China tech products—leaving out aluminum, washers, and solar panels) subject $100 billion of imports to tariffs of 25 percent. The retaliation so far announced (by China, Canada, Mexico, and the EU) is commensurate—it will be approximately 25 percent on $100 billion of U.S. exports.  So, at the moment, $200 billion of U.S. trade is in the crosshairs.

But a new Trump investigation into the national security implications of auto and auto parts imports could add another $600 billion of trade to the mix—$300 billion of imports hit with 25 percent duties and $300 billion of retaliation. The president wants to get the investigation completed before the election in November, so we could be up to $800 billion of U.S. trade by year’s end.  (That’s 20 percent of all U.S. goods trade, by the way.)  

So, 25 percent duties assessed on $800 billion of trade, approximately half of which would be U.S. manufacturing inputs and U.S. manufactured exports comes out to a combined $100 billion hit on the sector’s profits (25 percent of $400 billion).  That eclipses the $97 billion gain from the corporate rate reduction.

While this is all bad news for the economy, I wonder whether the tax-reform advocates who held their noses and excused Trump’s trade transgressions because tax reform would make everything right will start to speak out. Paging Larry Kudlow, Steve Moore, and Art Laffer.

 

 

 

 

 

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Time for Diplomacy, Not War, in Yemen

On Wednesday June 13 the Saudi-led military coalition launched an assault to seize Hodeidah, the site of Yemen’s main port. The port, currently held by Houthi fighters, is the primary channel through which humanitarian aid reaches millions of at-risk Yemenis, who have suffered from four long years of civil war.

The war has already taken a huge toll on Yemen. If the vital humanitarian aid delivered through Hodeidah is disrupted by a coalition assault, many more civilians could die.

The coalition had sought direct military assistance from the United States, which has provided weapons, intelligence, and logistical support throughout the war. The Trump administration declined, however, and encouraged the coalition to give the United Nations time for diplomacy. This remains the right approach. As tragic as the situation in Yemen is today, continued American support for military intervention is the wrong answer. Not only does the United States lack a compelling national security interest in Yemen, but by supporting the Saudi-led coalition the United States has contributed materially to the one of the worst humanitarian disasters of the 21st century. Further military support won’t improve American security, but it risks making things worse for Yemen.

Steel Yourself as Trump Cuts Off Trade to Spite His Face

Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States. This seldom used statute gives the president broad discretion both to define what constitutes a national security threat and to prescribe a course to mitigate the threat. On both counts, President Trump has abused that discretion.

In March, the president announced his intention to impose duties of 25 percent on steel imports and 10 percent on aluminum imports from all countries. But temporary exemptions were granted to some countries in an effort to extort commitments from them to do their part to reduce the U.S. trade deficit (by selling us less stuff and buying from us more stuff) or to agree to U.S. demands in ongoing trade negotiations (South Korea, Canada, Mexico). The Koreans succeeded by agreeing to limits on their steel exports and by upping the percentage of US-made automobiles that can be sold in Korea without meeting all of the local environmental standards. Ah, free trade…

Apparently, the Europeans, Canadians, and Mexicans haven’t bent sufficiently to Trump’s will, therefore those countries—those steadfast allies—constitute threats to U.S. national security and will no longer be exempt from the tariffs, which means that U.S. industries that rely on steel and aluminum (imported or domestic) will be hit with substantial taxes to mitigate that threat. Got it?

This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion—that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.

So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.

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Trump’s Trade Policy Is a Disaster, But Postponing the China Trade War Was Smart

Reactions in the United States to the Trump administration’s announcement on Saturday that it would refrain from imposing new tariffs on imports from China for the time being have been decidedly negative. One would expect criticism from the unions, the steel producers, and old economy manufacturing trade associations. After all, many seemed not the least bit concerned about burdening the economy with 25 percent duties on $50-$150 billion of Chinese imports and retaliation of similar scale against U.S. exports, as long as they secured for themselves a small bag of booty in the process. Trump’s “America-First” brand of economic nationalism was everything they had ever hoped for—and now it may be in retreat.

Likewise, one can understand why the administration’s decision to reconsider its approach to Chinese technology companies and Chinese technology transgressions makes the security hawks unhappy. Many of them have been peddling a self-perpetuating narrative that is one part fact to three parts innuendo, hearsay, and speculation that war (and not just the trade kind) between the United States and China is inevitable, and that there is very little scope for further cooperation. Why, they wonder, would Trump squander the leverage to compel real Chinese reform that was afforded by the results of the Section 301 investigation and ZTE’s existential predicament?

But I am most disappointed by those who present themselves as pro-trade, internationalist, cosmopolitan, and informed, but who seem strangely disappointed that the administration stepped back from the abyss. There was a point when these folks warned about the perils of Trump’s protectionist path, and screamed from the hilltops about how Trump’s unilateralism would kill the World Trade Organization. On Twitter, they goad Trump: “Trump blinked.” “Xi schooled Trump.” “U.S. credibility has been squandered” (as if it was somehow squandered THAT moment). For some of these people, disdain for Trump or the desire to be perceived as the most offended by his behavior is more important than supporting one of his rare decisions to do the right thing.

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Kill the Iran Deal, Open Pandora’s Box

This afternoon, Donald Trump made an announcement regarding the future of the Iran nuclear deal. Ahead of a self-imposed May 12th deadline, the President announced that he will not be waiving the sanctions. This decision places the United States in violation of the deal. But while it may not kill the JCPOA completely – European states and Iran could decide whether to keep some version of the deal going without the United States – it will start a period of profound uncertainty about the future of U.S-Iranian relations.

In some ways, this uncertainty is the most concerning thing about the current administration’s approach to the JCPOA. Trump’s speech included no realistic alternate strategy, other than “get a better deal.” His decision probably won’t be followed by public debate over whether conflict with Iran is desirable, a proposition that many in the administration seem to favor, but which most Americans would undoubtedly oppose.

Instead, by blowing up the nuclear deal today without offering any clear strategy or plan for an alternative, Donald Trump is opening Pandora’s Box, increasing the risks of escalation and bringing us gradually closer to conflict with Iran.

Initially, it probably won’t look that bad. Sanctions penalties will not kick in for 180 days. Iran has said it will take a few weeks to decide on its response, and discuss the issue with European signatories of the JCPOA. These countries may well try to keep some form of the deal running without the United States. 

Despite Growing Tensions, There Is Still Scope to Avert a U.S-China Trade War

If 2017 was the year of fiery trade talk, 2018 has been the year of provocative trade actions. During the first four months, President Trump imposed or announced intentions to impose tariffs on thousands of products stemming from five investigations conducted under three different, seldom-used laws. Talk of trade war is rampant and, as May begins, the troops are in formation—a circular formation, but a formation nonetheless! By Memorial Day, it should become much clearer whether their orders will be to shoot, hold fire, or demobilize.

What follows is a brief recap of the relevant trade policy actions of 2018 that have taken us to the present situation.

In January, the president imposed “safeguard” restrictions following two separate investigations of imports of large washers and solar cells, under Section 201 of the Trade Act of 1974.  Tariffs and tariff rate quotas, respectively, were imposed for a period of four years in both cases against imports from most countries. These safeguard measures are absolutely stupid as a matter of economics, but relatively trivial as far as the impact on U.S.-China relations and the prospects for trade war are concerned.

In March, under the guise of acting to protect national security, Trump invoked Section 232 of the Trade Expansion Act of 1962 to impose tariffs on imported steel and aluminum from all countries. Soon after the announcement and before the tariffs took effect, Trump offered temporary exemptions to several trading partners to “encourage” them to play nice: buy more U.S. stuff; sell Americans less foreign stuff; increase NATO spending (EU countries); agree to U.S. terms on various aspects of the NAFTA renegotiations (Canada, Mexico); agree to export quotas (South Korea) and the temporary exemptions will be made permanent. Well, as the temporary exemption period was about to expire on May 1, the president extended the deadline to June 1. Presumably, if the NAFTA negotiations wrap up this month (apparently, a real possibility) and Trump gets what he wants, Canada and Mexico will be permanently exempted from the steel and aluminum tariffs. Congrats!  It’s much less clear that the Europeans are willing to submit to these tactics. They’ve crafted a retaliation list and seem likely to go that route.  The Chinese, whose steel and aluminum exports have been subject to the tariff since March 23, have already retaliated against a list of 128 U.S. products (amounting to about $3 billion in U.S. exports), including ethanol, wine, nuts, fruit, and a few other commodities. 

Although the “national security” restrictions on steel and aluminum are a more significant irritant than the safeguard restrictions on washers and solar cells, they still only amount to a flea bite on an elephant’s hide relative to Trump’s most recent, most provocative, and—some would argue—most justifiable action so far. At the beginning of April, Trump announced his intention to impose tariffs on 1,300 Chinese products accounting for about $50 billion of exports to the United States, as a result of an investigation into Chinese intellectual property and forced technology transfer policies, under Section 301 of the Trade Act of 1974. The “remedy” also includes instructions for the Treasury Department to publish new investment rules that will make it harder for Chinese companies to purchase U.S. technology and U.S. tech companies.  Within a few hours of the U.S. announcement, China published a list of U.S. products, amounting to about $50 billion of exports to China (farm products, airplanes, autos, etc.), that it would subject to retaliatory duties of 25 percent should the U.S. measures take effect.

As of that point, between the 232 and the 301 cases, $106 billion of U.S.-China trade was in the crosshairs (about 15% of two-way trade). Then in reaction to China’s retaliation threat, Trump raised the stakes by instructing the USTR to identify another $100 billion of Chinese products to assess with tariffs.  That list has not yet been published, but if it is and China responds commensurately (by targeting another $100 billion of U.S. exports), its list would have to include ALL U.S. exports to China because total U.S. goods exports to China in 2017 amounted to $130 billion. (Services exports add another $50 billion, but they’re not easy to hit with tariffs). The next likely target would be U.S. companies operating in China—discriminatory taxes, regulations, restrictions, etc.  In any event, the amount of trade subject to tariffs ($306 billion) would begin to approach half the value of the two-way trade—a decidedly cataclysmic outcome.

President Trump seems to be aware of the stakes.  Last month he tweeted that trade wars can be good and are winnable. He cites the bilateral U.S. trade deficit as evidence that China needs us more than we need them.  Hopefully, he’s rational enough to realize that his avoidable actions would trigger a massive global economic contraction which, even if the United States is less hurt than others, history would not look kindly upon.

The month of May offers some opportunities to ratchet down the tensions and, even, find some solutions. The Trump administration’s trade policy team—USTR Robert Lighthizer, Commerce Secretary Wilbur Ross, Treasury Secretary Steven Mnuchin, National Economic Council Director Larry Kudlow, and National Trade Council Director Peter Navarro—is in Beijing this week, presumably to get China to commit to certain actions that would enable tensions to be dialed down.  Mid-month, the USTR is holding a hearing for the public airing of views about the Section 301 remedies, where it will be impressed upon the administration how costly a trade war would be.  And, presumably, toward the end of the month is the momentous Korean Summit.  If the president gets the results he’s looking for (whatever they may be) and Beijing is perceived as having played an important role in reaching that outcome, that could give Trump the cover he probably needs to put his pistols back in their holsters and focus on an effective, comprehensive U.S.-China free trade agreement. That should be the primary goal of U.S. trade policy during the Trump administration.

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