Trade Dispute with China is Likely to be a Long Battle
U.S. and Chinese businesses continue to suffer under the restrictive policies adopted in the U.S.-China trade war. A recent survey conducted shortly after China imposed additional tariffs on U.S. products by the American Chamber of Commerce for South China found that firms believe this trade war will last longer than a year. Tariffs on U.S. exports are anticipated to rise on January 1, 2019 if the U.S. follows through with its plan to raise tariffs on $200 billion worth of Chinese goods.
According to the survey, agriculture-related businesses have been the most hit by Chinese measures. The President of the American Chamber of Commerce South China told Reuters that customers are slowing down orders or not placing them at all; the same is true for Chinese businesses importing U.S. products. Importers may be holding back on placing orders until there is more certainty about trade policies, or they are shifting to other competitors who are willing to offer cheaper products, even sometimes at a loss, in order to capture market share. Nearly half the companies surveyed said there had been an increase in non-tariff barriers, with increased bureaucratic oversight and slower customs clearance being the most commonly cited problems. Analysts have warned that such risks to U.S. firms will likely grow as China is increasingly unable to match U.S. measures on a dollar-for-dollar basis.
Both governments are preparing for a long-term dispute, although President Donald Trump is still expected to meet with China’s President, Xi Jinping, at the November G20 summit if it appears the discussion will be positive. (Vice President Mike Pence stated at the Asian trade meeting that China was not demonstrating a compliance with WTO rules.) Many hope that sufficient progress during this meeting will encourage the Trump administration to suspend its plan to increase tariffs on $200 billion of Chinese imports, a move that will provoke retaliation by China. Previous trade negotiations have been ineffective, and the U.S. refused to resume trade talks without a firm proposal from China addressing forced technology transfers and other economic issues. On November 14th, China delivered a written response to U.S. demands on those and other issues. Further details on the content are unknown, but this could be a necessary starting point for continued negotiations. The trade war will persist unless the two countries can come together on the negotiation’s structural issues.
U.S. Re-imposes Final Round of Sanctions on Iran
Following through with the executive order signed on August 6th, the U.S. re-imposed the second round of Iranian nuclear-related sanctions on November 5th, which were previously lifted by the signing of the Joint Comprehensive Plan of Action (JCPOA), otherwise known as the Iran Deal. These sanctions mark the end of the 180-day grace period for countries and companies doing business with Iranian banks, oil, and shipping companies. Now, those that received sanctions relief under the deal will be relisted and anyone who assists with Iranian trade can also be sanctioned. These actions are the centerpiece of the administration’s maximum-pressure campaign to force Iran to end its support for militant groups and agree to renegotiate the nuclear deal.
In the first round, which took place in August, sanctions were re-imposed on Iran’s purchase of U.S. dollars, its trade in precious metals, trade in semi-finished metals for integrating industrial processes, certain financial assistance, and its automotive sector. This order also revokes all general licenses that allowed the importation of Iranian-origin foodstuffs, such as pistachios, into the U.S.
To counter any US retaliation against European businesses conducting transactions with Iranian companies, several European countries are preparing a legal program, special purpose vehicle (SPV), which will eliminate the exchange of currencies between the countries. The Economist used pistachios as an example in its November 8, 2018 edition on how the program would work:
“Under the mechanism, an Italian importer of Iranian pistachios, for example, would settle the tab of an Iranian firm buying German machinery through a ledger organized by European governments (these payments would be mirrored in Iran). No money would enter or leave Iran, many of whose banks are being cut off from the international financial system (on November 5th SWIFT, the Brussels-based international financial messaging system, said it would comply with American sanctions and suspend some Iranian banks’ access). Firms from third countries might be able to participate in the SPV, too.”
The countries leading the SPV are U.K, France and Germany but the press report problems in finalizing the program.
Trump Administration Announces Intent to Negotiate New Trade Agreements
U.S. Trade Representative Robert Lighthizer, as required under the Trade Promotion Authority (TPA), has notified Congress of the President’s plans to negotiate trade agreements with Japan, the E.U., and the U.K. While negotiations with the U.K. cannot formally begin until Brexit is finalized in late March of 2019, formal talks will start soon with the E.U. and Japan. Trump administration officials have continually expressed that Europe’s restrictive agricultural policies will be negotiated in any free trade agreement (FTA).
The dates of the scheduled U.S. Trade Representative public hearing on these FTAs are listed below:
- December 10 – U.S.-Japan Trade Agreement hearing; 9:30am in the main hearing room of the U.S. International Trade
- December 14 – U.S.-EU Trade Agreement hearing; 9:30am in the auditorium of the Herbert C Hoover Building, U.S. Department of
- January 29 – U.S.-UK Trade Agreement hearing; 9:30am in the main hearing room of the U.S. International Trade
With reference to the agreement with the U.K., the USTR has announced the US/EU FTA hearing and an opportunity to file written comments. The hearing will be presided over by the Trade Policy Staff Committee and held in Washington, D.C., December 14, 2018; written comments and/or intent to testify must be filed no later than December 10, 2018. While the EU continues to claim agriculture will not be part of the negotiations the notice, page 3, provides the following information:
- Other measures or practices that undermine fair market opportunities for U.S. businesses, workers, farmers, and ranchers that should be addressed in the negotiations.
A trade deal with Japan, the United States’ 4th largest foreign market, would be a big win. However, Japan is hoping that the finalization of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), from which the U.S. withdrew from, will be a negotiating tool against the U.S.’s aggressive tactics in bilateral negotiations. Secretary Perdue plans to urge Japan to lower its agricultural tariffs below CPTPP rates, a concession they have indicated they will refuse to make. Japanese leadership has insinuated that upcoming talks with U.S. could pave the way for a return of the U.S. to the CPTPP.
The Administration is also eyeing bilateral free trade agreements with African nations, including Ghana, Cote d’Ivoire, Kenya, and eventually South Africa. Undersecretary McKinney stated that while the markets in these countries are small, with the population growth they’re experiencing it would be worth it in the long term.
The administration will remain in consultation with Congress as negotiations move forward to ensure that talks are in line with Congress’ views. Objectives for negotiations will be released to the public at least 30 days prior to formal negotiations.
Draft Brexit Deal Released
After months of negotiations, Prime Minister Theresa May has released a draft Brexit agreement. This agreement outlines the billions of euros the UK will pay to leave, the rights designated to Europeans living in Britain after Brexit, and how the 21-month transition period will work. It also promises a solution to prevent a hard border between Northern Ireland and The Republic of Ireland; the UK will continue to be a member of the EU Customs Union until a more permanent solution is agreed and the proposal will result in unfettered trade between Northern Ireland and the Republic of Ireland. Numerous members of her cabinet resigned upon the release of this draft stirring concern that the Prime Minister may be ousted, but the cabinet ultimately approved of the deal on November 14th.
Because of the cabinet’s approval, the deal will go before a special European Council meeting on November 25th for EU members to endorse the UK’s exit terms. The Brexit plan does not satisfy many of those on either side of the issue. Both pro-European and pro-Brexit Members of Parliament have expressed discontent with it, bringing uncertainty as to whether this deal could pass. The British government cannot ratify the withdrawal agreement without the parliament’s approval, thus a meaningful vote on the deal is likely to be held in the House of Commons on December 18th. The country is set to cease its EU membership on March 29, 2019.
British politicians David Davis and Owen Paterson, as well as Shanker Singham, a director at Britain’s Institute of Economic affairs, believe May’s plan lacks “regulatory autonomy,” and will consequently prevent the UK from entering a free trade agreement with the U.S. or any other country. They argue that if this deal maintains the “full regulatory alignment” provision, then the UK is beholden to all the EU tariffs and customs, sanitary, phytosanitary, and scientific regulations that U.S. farmers and ranchers are hoping to see removed during Brexit. However, in a 90 minutes House of Commons question and answered period on Thursday, November 15th, the Prime Minister continued to emphasize Brexit would permit the UK to enter into FTAs with other countries, contradicting the opponents to the Brexit agreement.
If the customs union has not been sufficiently implemented by the end of the transition period stretching to December 2020, with mutual consent, the UK and the EU can extend the transition period one time. However, this would require the UK to make further payments to the EU.
U.S. and EU Eager to Start Trade Talks
Trade negotiators for the U.S. and Europe are quickly trying to establish a foundation for successful trade negotiations. They met in D.C. on October 23rd to start these talks towards the Administration’s goals of “zero tariffs, zero non-tariff barriers, and zero subsidies,” on non-auto industrial goods. For now, the focus of talks will be to ensure that regulations on goods and services are aligned for ease in trade between the U.S.-EU. This will be the third attempt since 2007 to remove non-tariff barriers with the EU. Trade negotiators are claiming progress on U.S.-EU trade talks, but since EU officials say agriculture, in general, is excluded from negotiations with limited exceptions such as with soybeans, only time will tell if progress will be made regarding specialty crops.
The Trump administration believes it is approaching negotiations from a place of power, citing retaliation for their “unfair” trade tactics as a point of strength. EU Ambassador to the United States David O’Sullivan suggested that negotiations should resume where, the now defunct, TransAtlantic Trade and Investment Partnership (TTIP) ended. He noted that balancing import and export levels between the U.S. and EU will not solve the deeply rooted macroeconomic trade differences. He asserted that the steel and aluminum tariffs can be ignored during negotiations, but unless they are dealt with, an agreement will not be signed. Ambassador O’Sullivan, while optimistic, remains worried unless progress in future talks is two-way. He also said the EU refuses to enter a voluntary export restraint agreement with the U.S., and the imposition of automobile tariffs in a nonstarter to negotiations. Austria’s member of the European Parliament Othmar Karas is not as optimistic as the Ambassador about the prospects of the revived talks. Mr. Karas fears mounting opposition by the EU public, which was a barrier to initial TTIP talks, could be the demise of these negotiations. At the moment, he sees EU political will as lacking.
WTO Reform Needed
The US-China trade war has made the need for reform in the World Trade Organization clear to the international community. Its inability to mitigate the escalating trade conflict between two economic powerhouses reflects a flaw in the organization’s influence on international trade. The organization has not seen significant reform since its inception in 1995. The U.S. has criticized the dispute settlement mechanism of the WTO, citing the “judicial activism” by the appellate body. Rather than interpreting existing laws, the criticism is that the judges fill in holes that exist due to lack of reform. The Trump administration argues that current WTO regulations fail to limit China’s intervention in the industry through subsidies, discrimination again foreign investors, and forced transfer of technology.
The EU and Japan have attempted to negotiate with both parties for WTO reforms and open trade. Any reforms will require negotiation with all the WTO members. However, the obstacle remains the inability for the WTO members to reach agreements as a result of blocs based on economic prowess – the very obstacle that has prevented the success of the Doha round. Any reforms would have to appease the U.S.’s demands while not favoring richer economies.
Ottawa held a meeting of thirteen trade ministers to discuss reforms of the WTO. While not in attendance, the U.S. gave its approval for the meeting. Issues on the agenda for discussion included establishing a level playing field, flexible approaches to reform, resolution of the dispute over Appellate Body appointments, and trade-distorting farm subsidies. Officials have yet to release information as to the outcome of this meeting.
Trade War Harms More Than the USMCA Helps
Purdue University researchers conducted a study for the Farm Foundation on the effectiveness of President Trump’s trade policy. The study found that the ongoing trade wars are costing farmers far more than they gain from the U.S.-Mexico-Canada Agreement. U.S. exports of mainly poultry and dairy will increase by an estimated $450 million per year due to the quotas and other measures built into the trade deal with Mexico and Canada. However, retaliatory tariffs imposed on U.S. agriculture commodities by Canada, Mexico, China and the EU will cost farmers and ranchers up the $7.9 billion per year.