Topic: Trade Policy

Trade War with China Slashed U.S. Exports 26.3% as U.S. Imports Rose 38.5%

The Trump Administration’s trade warfare with China began in earnest last March 22nd (following steel and aluminum tariffs that primarily hit other countries). U.S. and Chinese tariffs on each other’s goods then escalated repeatedly through September 18 with threats of much more the same by March 1 of this year.

The effect so far has been quite different from what President Trump first promised and still keeps pretending.  In fact, U.S. goods exports to China (excluding services) fell by 26.3% from March through October, while U.S. imports from China rose by 36.5%.

US China Trade Data

U.S./China trade data were supposed to be updated for November on January 8, but that potential embarrassment was mercifully postponed by President Trump’s government shutdown.  Yet Reuters, using Chinese data, estimates the U.S. trade deficit with China rose 17% last year.  The table makes that estimate look low. 

Meanwhile, the Trump shutdown is rationalized by his fanciful untruths about people and drugs “flooding across the border” on foot between checkpoints, rather than in planes, trains, ships, trucks, and cars (not to mention overstaying visas).  

Oddly enough, Mr. Trump waited until after Republicans had lost the House to demand more billions for “The Wall” (as though the Executive Branch wrote the laws). 

If the end result of political feuding over a border wall turns out to be half as big a fiasco as President Trump’s trade war, how could he hope to run for reelection on the blatant failure of his two noisiest campaign issues?  But it might not be too late for Trump to quietly discard his losing cards and pivot toward more promising games and issues.  

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U.S. Trade Policy Agenda in 2019? Fixing What’s Been Breaking Since January 20, 2017

Upon taking office in 2017, President Trump accused trade partners of underhandedness, demonized U.S. companies with foreign supply chains, and perpetuated the false narrative that trade is a zero-sum game requiring an “America First” agenda. He withdrew the United States from the Trans-Pacific Partnership, threatened to pull out of North American Free Trade Agreement and the Korea-U.S. Free Trade Agreement, and initiated a war of attrition against the World Trade Organization by refusing to endorse any new Appellate Body judges until his unspecified demands were met. Yet, those were still the halcyon days of trade.

In 2018, straining all credulity, the Trump administration dusted off a seldom-used law (Section 232 of the Trade Expansion Act of 1962) to impose tariffs on imported steel and aluminum from most countries on the basis that national security is threatened by U.S. dependence on foreign sources of these widely available commodities.

Later in the year, invoking another controversial U.S. trade statute (Section 301 of the Trade Act of 1974), which is widely considered an act of vigilantism under WTO rules, the administration announced tariffs on $50 billion worth of imports from China for alleged unfair practices, such as forced technology transfer and intellectual property theft. When Beijing retaliated with tariffs on U.S. agricultural products, Trump announced that he would hit another $200 billion of imports from China with tariffs. Once again, Beijing responded by broadening its list of targeted U.S. products and the president subsequently threatened to apply U.S. levies to all imports from China (over $500 billion in 2017).

To be fair, U.S. trade policy in 2018 wasn’t only rancor, hostage-taking, and trade war. Juxtaposed against this contentious, grievance-based, enforcement-oriented U.S. posture was some “trade liberalization.” Instead of withdrawing from NAFTA and KORUS, the Trump administration renegotiated both. Both included some liberalizing provisions, but also some lamentable, protectionist retrogression, which wasn’t totally unexpected given that, in both cases, U.S. insistence on renegotiation was motivated less by an interest in updating, expanding, and modernizing the agreements than by a desire to revise provisions that would—at least nominally—tilt the playing field in favor of U.S. workers and certain manufacturers.

As 2019 begins, five major issues cast long shadows over the trade policy landscape. First is whether and how the U.S.-China trade war will be contained, scaled back, and ultimately ended. Second is the looming possibility that the Trump administration will invoke national security to impose sweeping new tariffs on automobile imports. Third is the question of whether and when Congress will pass the implementing legislation for the new NAFTA (the United States-Mexico-Canada Agreement or USMCA). Fourth is whether, when, and how the crisis at the WTO will be resolved. And fifth concerns whether the Trump administration has the wherewithal to make good on its stated intentions of negotiating new trade agreements with Japan, the European Union, the Philippines, possibly the United Kingdom, and other countries. With much of the rest of the world moving forward with a slew of new trade agreements and the United States stuck on revamping old deals, the real and opportunity costs to U.S. businesses, consumers, and taxpayers continue to mount.

Throughout the year ahead, these major issues will be the predominant focus of the research and writing of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

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Some Questions for the Democrats on Trade

Presidents have the power to set the agenda and drive policy debates, and President Trump has put trade policy front and center. While President Obama moved slowly on trade policy during his first term (he picked up the pace during his second term), and candidate Hillary Clinton called for a “pause” on trade policy during her campaign, Trump has made an activist (and protectionist) trade policy one of his signature issues. Among other things, he has imposed tariffs under a number of trade statutes, accused many other countries of cheating on trade, renegotiated some existing trade agreements, and challenged the functioning of World Trade Organization by blocking the appointment of appeals court judges.

This flurry of trade policy activity has brought a wide-ranging debate over the foundations of trade economics, trade law, and trade politics. Ultimately, this debate might be productive, and it has provided an opportunity to explain these issues to the broader public. In the short-term, however, it has led to a chaotic and economically harmful U.S. approach to trade policy.

With trade policy making headlines, the current group of actual and aspiring Democratic leaders may be forced to make some tough choices on trade. It is not so much whether they are “for it or against it,” but rather, what exactly are they for?

In the short-term, this question is for the House Democrats, who have a great deal of power over Trump’s trade agenda. The administration has negotiated a new NAFTA (called the U.S.-Mexico-Canada Agreement, or USMCA), and Congressional ratification will require support from at least some House Democrats. But do they like the agreement Trump negotiated? And do they want to give Trump a political win? So far, many of them seem skeptical about supporting it in its current form.

But the more interesting question is the longer-term trade agenda of the Democratic party. We just hit 2019, but 2020 Democratic presidential candidates are coming forward already, and with trade policy making daily headlines they will almost certainly be offering their views on trade. Senator Elizabeth Warren has already announced that she would form an “exploratory committee,” and has said a few things about trade. Her statements so far have hints of traditional economic nationalism, but leave room for maneuver, and many questions remain. Here are a few questions I would like to see reporters ask her:

- Does she think the tariffs on Chinese imports are working, and would she keep them in place or remove them? What alternative strategies would she consider to address China’s trade practices?

- Would she maintain the steel and aluminum tariffs imposed for what are said to be “national security” purposes?

- Would she support Congressional ratification of the USMCA (subject to certain changes), or would she wait and try to renegotiate NAFTA herself if elected? How exactly would her vision of trade agreements differ from the existing model?

- With which countries, if any, would she negotiate new trade agreements?

- Would she end the Trump administration’s tactic of blocking appointments to the World Trade Organization’s appeals court?

Prior to 2016, it was difficult to imagine so much focus on the details of trade policy. Many politicians were content to proclaim vaguely that they were for “free and fair trade” and leave it at that. But now we have a number of specific actions on the table, and it is worth asking presidential candidates what they think of each one.

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Is The Trump Administration Willing To Make A Deal With China?

The escalating tariffs imposed by the United States and China in recent months are making people and markets nervous, and just about everyone would like to see a deal of some sort. Over this period, prospects for a deal have gone up and down with the latest Trump tweet, but some reports suggest that the prospects now look promising. The current negotiating timetable is based on a 90-day period that Presidents Trump and Xi agreed to at their dinner in Buenos Aires on December 1 during the G20 talks. But what exactly would a deal look like? The Trump administration talks a lot about what it wants China to do, and the media mostly focuses on that. But what, if anything, will the administration give as part of this deal? Mike Santoli of CNBC Closing Bell asked  White House trade adviser Peter Navarro this question recently:

MIKE SANTOLI: Peter, you started out by saying how President Xi in 45 minutes gave a presentation showing a willingness to address all the United States’ concerns and then you say but everything else they have done essentially means that you’re very skeptical, I assume, of the likelihood of them delivering that. In exchange for what was the President suggesting that they would perhaps promise these reforms? In exchange for what from the United States?

PETER NAVARRO: …In terms of what we give back, I mean therein lies the rub. President Trump has been eloquent in stating that we are the piggy bank of the world. We’re in all these sorts of one sided bad trade deals and the problem that we have whenever we negotiate with whoever we negotiate is they are getting such a great deal they really don’t want to give us anything. So we are not prepared to give them anything in terms of a deal quid pro quo because we are so much behind the eight ball. We are not stealing their technology. We are not forcing the technology transfer. We are not manipulating our currency. We are not counterfeiting and pirating Chinese goods and flooding their markets. We are not having state owned enterprises run rampant around the world, basically exploiting the rest of the world. So what is there for us to give? What we have to give is access to our markets, period. The largest market in the world. Access to our financial markets, our capital markets. This is a great gift that we give to other nations. But we’re not going to do it anymore – President Trump’s made it clear – we’re not just going to give that away and be exploited.

In short, Navarro says that the administration will not be giving anything. Of course, even if he knew otherwise, he probably feels like he has to say this as part of the administration’s negotiating strategy. But regardless of what he or the administration says about this, the reality is likely to be different. Generally speaking, trade deals involve concessions by both sides. And with China in particular, given its “century long humiliation” of being pushed around by foreign powers, one-sided deals are going to be very difficult politically. And that seems to be how China is thinking about these negotiations, as a spokesperson for China’s Ministry of Commerce recently suggested: “In the next 90 days, China and the U.S. will negotiate on major issues of bilateral concern based on the principle of ‘mutual respect, equality, mutual benefit, and being mindful of each other’s concerns,’ aiming at the ultimate goal of removing all additional tariffs, and striving to reach consensus.”

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Another Failed Defense of the Jones Act

As the Cato Institute continues to press the case for Jones Act reform, defenders of this flawed and failed law have repeatedly made clear that they’ve taken notice. Fresh evidence of this was seen earlier this month with the publication of an op-ed on the leading maritime website gCaptain.com. Entitled “CATO’s Continued Attempt to Skin the Jones Act,” the piece was an obvious preemptive salvo launched a day prior to Cato’s recent conference on the law’s shortcomings. A close reading, however, reveals it to be another instance of Jones Act defenders missing the mark.

Examining the law’s history, author Sal Mercogliano—a professor at Campbell University—claims that prior to the outbreak of World War II that “the Jones Act, reinforced by the Merchant Marine Act of 1936 ensured that not only was there a domestic shipbuilding industry, but it could be ramped up to support the building of over 5,000 merchant ships…” This is, at best, incomplete. As the book Global Reach points out, during this time U.S. merchant shipbuilding was almost non-existent and the fleet itself in obvious decline:

By the mid-1930s American merchant shipbuilding had come to almost a complete halt. In the nearly twenty years following the end of World War I, America’s merchant fleet, including its cargo and passenger ships, was becoming obsolete and declining in numbers; nearly 90 percent of the merchant fleet was more than twenty years old, and few ships could do more than ten or eleven knots. Although the Maritime Commission established by the Merchant Marine Act of 1936 had planned to build 50 ships a year under its CDS provisions, by 1939 the United States had only about 1,340 cargo ships and tankers, fewer than the total built by U.S. shipyards in 1914-17, even accounting for wartime losses. In no respect was the U.S. commercial industry capable of meeting the demand for sealift posed by the looming conflicts in Europe and the Pacific.

It’s also worth pondering why, if the Jones Act should be regarded as a success, the Merchant Marine Act of 1936 was even needed.

Dr. Mercogliano’s explanation of stupefying U.S. shipbuilding costs—commonly estimated to be three to five times greater than those of Asian shipyards—similarly leaves much to be desired:

CATO contends that the Jones Act is a burden that American can no longer bear. Specifically, they cite the higher cost to build ships in America as opposed to overseas. The largest builders of commercial ships in the world today are the Republic of Korea, the People’s Republic of China, and Japan; nine out of every ten ships afloat are built in East Asia. The question that needs to be raised is why? It is the exact reason that the CATO Institute rails about with the United States – government subsidies. The South Korean government announced the injection of over $700 million dollars into Hyundai Merchant Marine to stabilize the largest Korean shipping line. It was announced that the South Korean government would be infusing over $1 trillion into shipbuilding, in violation of the World Trade Organization.

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Jones Act Reform Gaining Momentum

Last week was a busy one for advocates of reforming the Jones Act. On Thursday the Cato Institute held a well-attended conference on the subject that featured a veritable Who’s Who of Jones Act experts and reform advocates. Video of the conference has now been posted, and those who were unable to participate or watch live should make sure to check out the many outstanding presentations that were made.

But ours was not the only gathering where the law was placed under scrutiny. Last week also saw a panel discussion held on the Jones Act as part of the National Hispanic Caucus of State Legislators’ (NHCSL) annual summit in San Diego. Unfortunately, the panel consisted only of myself and a moderator as invitations to groups supportive of the 1920 law apparently went unanswered. Nevertheless, the discussion was lively and opposition to the law in abundance.

Just how abundant became clear the next day, when the NHCSL voted on a resolution calling for the law’s repeal. Co-sponsored by New Jersey State Senator Nellie Pou and Pennsylvania State Representative Ángel Cruz, it passed by an overwhelming 56-10 margin.

The resolution, whose provisions include a call for NHCSL members to put forward similar measures in their respective legislatures calling for the Jones Act’s repeal, already appears to be bearing fruit. Puerto Rico Rep. José Aponte has announced his intention to introduce such a resolution. Others are sure to follow.

These are only the latest signs of support, particularly at the grassroots level, for reform of this failed law. Earlier this year, for example, the New York City Bar Association endorsed a permanent Jones Act exemption for Puerto Rico.

Unfortunately, too many in Washington still don’t grasp the necessity of revisiting the Jones Act. But even here in D.C. there is good news to be found, with reform advocates set to be bolstered by the arrival of newly elected Rep. Ed Case of Hawaii. A longtime opponent of the law, Case was victorious in his race against another Jones Act critic, Cam Cavasso. Congressional races where the nominees from both major political parties compete to burnish their anti-Jones Act credentials is certainly a refreshing change and would seem to speak to mounting opposition to the law.

The Jones Act has existed for over 98 years, and the edifice’s immediate collapse is unlikely. But cracks in the foundation are beginning to appear. 

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Will Progressives Vote for Trade Liberalization?

At the G20 meeting in Buenos Aires today, the renegotiated NAFTA – in the U.S., the new agreement is referred to as the United States - Mexico - Canada Agreement, or USMCA – was signed by the three parties. The big question now is, what will Congress think of the agreement as it decides whether to ratify it? One aspect of this question is, what will the Democrats who now control the House think of it? And to get even more specific, I’m very curious to see what progressives think of it. While she is in the Senate rather than the House, Senator Elizabeth Warren may be a good indicator of what many progressives think. Yesterday, Senator Warren gave a speech at American University in which she set out “her vision for a progressive foreign policy that works for all Americans.” She covered a lot of ground, and I won’t go through all of it, but here is a key bit on trade policy:

By the time the 2008 global financial crash came around, it only confirmed what millions of Americans already knew: the system didn’t work for working people - and it wasn’t really intended to.

And it’s still not working. Tomorrow, the Trump Administration will likely sign a renegotiated NAFTA deal. 

There’s no question we need to renegotiate NAFTA. The federal government has certified that NAFTA has already cost us nearly a million good American jobs - and big companies continue to use NAFTA to outsource jobs to Mexico to this day.

But as it’s currently written, Trump’s deal won’t stop the serious and ongoing harm NAFTA causes for American workers. It won’t stop outsourcing, it won’t raise wages, and it won’t create jobs. It’s NAFTA 2.0.

For example, NAFTA 2.0 has better labor standards on paper but it doesn’t give American workers enough tools to enforce those standards. Without swift and certain enforcement of these new labor standards, big corporations will continue outsourcing jobs to Mexico to so they can pay workers less.

NAFTA 2.0 is also stuffed with handouts that will let big drug companies lock in the high prices they charge for many drugs. The new rules will make it harder to bring down drug prices for seniors and anyone else who needs access to life-saving medicine.

And NAFTA 2.0 does little to reduce pollution or combat the dangers of climate change - giving American companies one more reason to close their factories here and move to Mexico where the environmental standards are lower. That’s bad for the earth and bad for American workers.

For these reasons, I oppose NAFTA 2.0, and will vote against it in the Senate unless President Trump reopens the agreement and produces a better deal for America’s working families.

How can we make the system fair for working Americans? Lots of ways.

  • We can start by ensuring that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.
  • We can make every trade promise equally enforceable, both those terms that help corporations and those that help workers.
  • We can curtail the power of multinational monopolies through serious antitrust enforcement.
  • We can work with our international partners to crack down on tax havens. 

Those four changes would fundamentally alter every trade negotiation. 

I disagree with most of her views on the impact of NAFTA, but putting that aside, what I’m curious about here is what it would take to get her to support the new NAFTA. I’ve read through her remarks a couple times now, and I still can’t figure out precisely what changes she wants and expects in NAFTA 2.0 in order to vote for it. First of all, the tax haven and monopoly issues are not likely to be addressed seriously through a trade agreement anytime soon, so we can ignore that part. On the other hand, the labor protections and worker issues are already in the new NAFTA, and the Trump administration pushed for changes in this area that gave labor groups far more than President Obama’s Trans Pacific Partnership did. So what is Senator Warren’s goal with these statements? Is she laying the groundwork for a “no” vote on the agreement, regardless of any additions to the agreement the Trump administration might accept? Or are there changes on labor rights that would satisfy her and get her to vote in favor?

My instinct is that she will not vote for any trade agreement negotiated by Trump, but we’ll see. Perhaps there is more potential with the younger progressives in Congress who are not as wedded to the economic nationalist views of senior Democrats. Has anyone asked Alexandria Ocasio-Cortez what she thinks of trade liberalization and whether there is a trade agreement she could support? I’m curious whether she and other young progressives who are open to immigration could also be open to trade. I’ve seen her sound skeptical about trade deals on Twitter, but now she will be governing rather than campaigning, and that could make her think more deeply about whether blocking trade with people in other contries is really a good policy.

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