It’s hard to believe that transnational corporations—who sought and gained access to low-cost, non-union Chinese labor and more than one billion Chinese consumers in the 1990s and 2000s—could not have foreseen the day that China itself would compete in advanced technology products and markets. It turns out that globalization, like trade itself, never was free and would always produce discontents, not just among the workers and communities discarded by those globally outsourcing corporations, but recently among national security cold warriors looking for ways to “contain” new enemies—above all, China.
One U.S. trade policy expression of this discontent are tariffs on steel and aluminum imports—not just those from China, but also the European Union, Japan, Mexico, Canada and other members of the World Trade Organization. The Trump administration justified those tariffs (and threatened others on automobile imports from Europe, Mexico, Canada and Japan) under Section 232 of the Trade Expansion Act of 1962, as required for “core industries” critical to U.S. national security. A Department of Commerce report argued, “The United States defense industrial base depends on the American-owned auto sector for the development of technologies that are essential to maintaining our military superiority,” (Inside U.S. Trade (IUST), subscription required).
Former steel industry lawyer and current U.S. Trade Representative Robert Lighthizer has been unsatisfied by negotiations at the Organization for Economic Cooperation and Development (OECD) to reduce China’s state-subsidized steel production capacity. China, the world’s largest producer, consumer and exporter of steel, is not a member of the OECD. Section 232-justified tariffs are one expression of that dissatisfaction.
The Trump administration’s erratic responses of discontent extend to North America, too. Just 13 days after withdrawing Section 232 tariffs on Mexico and Canada to expedite their legislatures’ ratification of the revised North American Free Trade Agreement, President Trump announced on May 30 that a five percent tariff would be imposed on imports from Mexico beginning on June 10. The announcement was harshly criticized by both business groups and Republican members of Congress who support ratification of the New NAFTA. The tariff would increase five percent a month, to a maximum 25 percent, if the Trump administration determined that the Mexican government had not acted adequately to prevent undocumented migrants and narcotics from crossing the border into the United States.
The administration has also taken aim at other ways China supports its businesses and industrial strategy. In May, the U.S., Japan and the European Union proposed World Trade Organization rules to limit subsidies for products from all state-owned enterprises. China has insisted that any new rules on industrial subsidies and state-owned enterprises be linked to reforms of agricultural subsidies. The U.S. and EU—both heavy agricultural subsidizers—have rejected such a linkage. (IATP has for decades criticized the lack of WTO agricultural subsidy reform to prevent and discipline agricultural export dumping.) On May 13, China released a proposal on WTO reform, which included the linkage framework plus dispute resolution reforms and stated it would host a meeting in November to discuss reform proposals.
The announcement in May of national security-justified U.S. export bans on semi-conductors and other components to the Chinese computer technology giant Huawei represents a further escalation of the trade related cold war. Some trade policy analysts believe that the Trump administration’s prohibition on U.S. firms to do business with Huawei and persuasion of other countries to follow its lead, could result in long lasting Section 301 tariffs (a multi-purpose U.S. trade agreement enforcement tool), as well as the Section 232 tariffs, (IUST).
This use of the national security claim to erect trade barriers has been strongly contested at the WTO. Despite U.S. warnings that the WTO’s legitimacy and viability would be jeopardized if it allowed members to dispute the Section 232 tariffs, a WTO panel ruled in April that the current disputes could proceed. A former head of the WTO’s Appellate Body said that he thought the Section 232 tariffs would be “very difficult to defend” in terms of organizational rules, (IUST). The Trump administration almost certainly will not comply with any adverse WTO rulings.
The price of the trade related national security measures, as well as of the Section 301-justified tariffs, is high and likely to grow the longer that there is no U.S.-China agreement. According to the Federal Reserve Bank of New York, the Trump administration’s 25 percent tariff on $200 billion of Chinese exports to the United States will cost U.S. households about $106 billion a year, if maintained—this figure excludes the impacts of five percent or greater tariffs on imports from Mexico. According to the May 2018 list of U.S. demands, China’s government is to “work with China importers to engage in trade transactions” that would “reduce the trade deficit by at least $200 billion by 2020.” Fulfillment of this demand seems very unlikely, following the U.S. embargo on business with Huawei and its pressure on other countries to blacklist Huawei and other Chinese technology companies.
Following the second round of Chinese tariff retaliation, the U.S. Department of Agriculture announced a yet-to-be finalized $16 billion program of Commodity Credit Corporation (CCC) retaliation compensation. The largest share of these program payments—like the first round of $12 billion of compensation in late 2018—probably will go to the largest 10 percent of farm corporations and farm partnerships. The $28 billion in total CCC funds for trade policy-triggered compensation responds to tariff retaliation mainly from China, but also from the European Union, Mexico, Canada and India. The CCC, a U.S. government-owned enterprise, has borrowing authority of $30 billion for all its chartered purposes to “stabilize, support and protect farm income and prices.” As a result, the CCC will have only $2 billion more to distribute until it is replenished.
If the U.S.-China negotiations deadlock, Congress would have to increase that borrowing authority for more trade related payments in 2020. President Trump continues to appeal to the patriotism of farmers to suffer economic harm for the sake of putative long-term gains for the whole U.S. economy. But, as one analysis noted, “From the perspective of China’s government, the ultimate goal of retaliatory tariffs is to inflict economic loss on politically influential interest groups in the United States, turning them into lobbyists for easing trade restrictions.” For the largest agriculture operations, shielded considerably by the CCC payments, continued patriotic sacrifice may well be possible through 2020. But the 90 percent of farm operations that are not or less CCC payment-protected may have no option but to become such lobbyists or to file for bankruptcy.
Let’s compare the value of the CCC program in the transactional terms that have characterized Trump administration diplomacy.
China suggested that it might purchase $30 billion of U.S. agricultural products over a yet-to-be determined period of a U.S.-China “memorandum of understanding” that Ambassador Lighthizer claims to be exempt from congressional review, (IUST). In 2017, China imported about $24.2 billion of U.S. agricultural goods. That figure declined to $16.7 billion in 2018 and the USDA’s Economic Research Services (ERS) forecasts a drop to $9.4 billion in 2019. (USDA is currently restructuring, downsizing and planning to relocate the parts of ERS that are unpopular with the White House.)
Relative to the 2017-2019 reduction of $14.8 billion in agricultural exports to China, plus the $28 billion cost of trade related taxpayer compensation by the end of 2019, from a trade transactional viewpoint, China’s proposed $30 billion of purchases of U.S. agricultural products—over a time yet-to-be defined—does not appear to be a good deal. Remarkably, according to a Federal Reserve Bank of Minneapolis survey, low and declining farmgate prices paid by U.S. agricultural processors and exporters are the top 2019 concern of 75.7 percent of those agricultural lenders surveyed; tariff and trade related issues were the top concern of just 10 percent.
Or, perhaps not so remarkably.
As Harwood Schaefer and Daryll Ray recently wrote, “Over the last 150 years, there have been only three times, totaling maybe 15 or so years, that exports have resulted in profitable prices for major crops in general: WWI, WWII, and the mid-1970s.” Rather than betting the farm on export markets vulnerable to policy and financial market shocks, they propose U.S. agricultural policy measures to strengthen farmgate prices by correlating supply to demand.
Such measures might be decried as “socialism” during the current U.S. electoral season. But, if there are no agreements, bilateral as the U.S. prefers, or multilateral as China has proposed for WTO reform (IUST), absent U.S. policy reform, U.S. farmers can only hope that climate-related events will drive down supply and drive up prices in the U.S. futures markets, as has happened for corn in the second quarter of 2019.
Some business groups advocate a trade in goods and tariff relief only agreement with China that would not address cross-sectoral issues (e.g. cyber-security) to reduce tariff triggered economic pain and the likelihood that the current cold war becomes a hot one. However, Christopher Painter, a former State Department cyber-security official, was cited in IUST, asking, “If you’re not addressing the huge long-term issues like this [cyber-security]—which go to the heart of our economic future—why do this deal?” If you do, however, negotiate such long-term issues, can you do so effectively with tariffs and threats of higher tariffs as your chief technique of persuasion?
If the U.S. Congress, upon which the Trump administration depends for CCC reauthorization, cannot find a way to reduce the geopolitical damage of the administration’s trade policy, the next administration may inherit a new cold trade war with unreliable “allies,” such as Russia, Brazil, Hungary and Saudi Arabia. At that point, tariffs levied unilaterally by the U.S., without WTO trade dispute resolution authority, will be an antiquated policy weapon, like a cavalry horse in a bot war.
