US trade policy towards China - a few random observations (2017)

China accounts for half of the US trade deficit, but much less in value-added terms. In value-added terms, the bilateral trade deficit (16% of total) is only slightly smaller than the deficit with Japan (13%) and Germany (11%). (This is not likely to cut much ice.)

On March 31, 2017, President Trump issued an executive order for the USTR and Commerce Department to submit an Omnibus Report on Significant Trade Deficits that focuses on major bilateral merchandise trade imbalances.  At the April 6-7, 2017, summit meeting, Presidents Trump and Xi agreed to establish a “100-day plan on trade”.  On April 20, 2017, the Trump Administration initiated a Section 232 investigation on the effects of steel imports on U.S. national security. On April 27, the administration initiated a similar investigation on aluminum. (China is the world’s largest producer of these commodities.) On August 14, 2017, President Trump issued a memorandum directing the USTR to determine if China's policies regarding IPR theft and forced technology requirements "may be harming American intellectual property rights, innovation, or technology development," and thus warrant USTR action under Section 301 of the 1974 Trade Act. On August 18, 2017, the USTR announced it had launched a Section 301 case against China. 

The US imposed tariffs of 20-50% on US imports of solar panels and washing machines (including imports from China) in January. US solar and washing machine tariffs were the result of a little-used provision of US trade law Section 201, Trade Act of 1974 (global safeguards action). Under Bush and Obama, safeguards were used but proved temporary (2002 Bush steel; 2003, the WTO ruled against the US and the Bush administration withdrew the tariffs; Obama 2009 tariff on Chinese tyres; China filed a WTO dispute, but WTO largely upheld US safeguards and Beijing was not legally authorized to retaliate. China hit back by launching its own investigation that resulted in a new antidumping tariff on US exports of chicken feet. Washington challenged Beijing's chicken feet tariffs at the WTO and largely won its case.) As for the 100 day plan on trade, China promised to import more beef (but this is a promise it had made before the Trump administration took office) and open its financial sector further. In an attempt to assuage Washington, it also signed large business deals during the US president’s visit to Beijing (but these deals were generally already in the pipeline.) This has not satisfied the US administration and has not prevented it from taking trade measures, directly or indirectly aimed at China. 

Under more controversial US trade laws than those invoked in the solar case, the US administration has also decided to impose tariffs on steel and aluminum for national security reasons (under Section 232 of the 1962 Trade Expansion Act). It is also seeking to take measures in response to China's alleged theft of intellectual property (under Section 301 of the 1974 Trade Act). The US administration decided to impose tariffs on Chinese aluminum foil producers, which it says were unfairly subsidized and were selling the products below fair-market value.  Antidumping duties are said to range from 49% to 106%. Countervailing duties are said to range from 17% to 81%. (In 2016, value of foil imports from China estimated at USD 389m.) The US will reportedly also impose tariffs of 25% in steel and 10% on aluminum imports under Section 232 as early as next week.

Beijing has been trying to manage trade tensions in a number of ways (signing of large business contracts, promise of market opening). In response to the imposition of tariffs on Chinese solar exports, Beijing has launched an anti-dumping/ subsidy investigation into USD 1 bn of US sorghum exports to China. It also seems to consider taking action on US imports of aircraft and soybean. The investigation could result in new Chinese tariffs that would hurt US farmers. China seeks retaliation by targeting the US president’s political base. China will seek to retaliate without violating WTO rules ensuring that retaliation is proportionate.

A full-blown trade war remains unlikely given the economic damage it would do to both sides. There are signs of increasing congressional and business opposition to US protectionist policies. The fall in the equity market following the steel and aluminum tariff announcement might also make the US administration more cautious. China will retaliate, but only in a measured way. The EU, Canada, Mexico and others are likely to do the same while bringing their cases to the WTO. 

The US is also moving towards tightening the rules governing its inward FDI regime. Congress is keen to tighten the rules, not just on national security grounds but also to prevent China from acquiring “strategically important technologies”. It is very likely that such a move is also being seen as a possible bargaining chip vis-à-vis Beijing in an attempt to open the Chinese economy to US/ foreign direct investment. Investment and IPR are other points of contention between the US and China and is likely to remain a cause of friction (and bargaining).

Source: WTO

US, NAFTA, Mexico - a quick observation (2017)

The US has been running persistent trade deficits with both Mexico and Canada. Observers believe that the negotiations are unlikely to be concluded this year. It is also not very likely that negotiation will break down this year. That said, Mexico’s threat to retaliate against US steel tariffs might raise US-Mexican tensions. Same for US-Canada.

An analysis of US jobs that rely on exports to Canada and Mexico finds that a NAFTA dissolution would cost less than 200,000 jobs in the US export sector over a 1-3Y period. By comparison, a total of 7.4m US workers were displaced or lost their jobs involuntarily during 2013-15. The most affected states would be Arkansas, Kentucky, Mississippi, and Indiana. The most affected sectors would be autos, agriculture and manufacturing.

NAFTA supply chains help reduce production costs by providing low-cost intermediate inputs to US firms. Lower production costs mean domestic consumer prices and the cost of US exports are lower than they would otherwise be. In order to be eligible for duty-free imports under NAFTA, member countries must abide by rules of origin. Tightening rules of origin, which effectively raises the cost of trade, is unlikely to increase trade or lower the trade deficit but is very likely to disrupt supply chains. Often higher tariffs are circumvented or third-country producers step in to provide additional supply. The economic impact on the US will be limited.

As for Mexico, if NAFTA is dissolved, Mexico would default to WTO rules. This will affect trade, but the macro impact would be manageable, not least because the Mexican peso would adjust, keeping Mexican exports to the US competitive. Higher inflation following currency depreciation would require higher interest rates, but the economic shock would prove temporary. Mexican manufacturing exports would face an average tariff of 2.4%, while Mexico under WTO rules would be allowed to impose import duties of 5.2% on US manufacturing exports. This is an average. Individual products may face stiff duties (e.g. Mexican pick-up truck would 25% tariff). Not all Mexican and Canadian exports to the US use NAFTA rules. This will further mitigate the impact of NAFTA dissolution on Mexican exports to the US,

A NAFTA break-up would hit domestic Mexican investment and cause a short-lived recession. Moody’s estimate of Mexico’s medium-term GDP path may be somewhat optimistic. Mexico’s growth potential is 3% at best. But the NAFTA shock would prove temporary and Mexico would return to its pro-dissolution growth path after 12-18 months. The impact would be manageable for the following reasons. Mexico would revert to (low) WTO tariffs on the slightly more than 50% of its exports to the US that currently take place under NAFTA rules. US companies would continue to have significant incentives to do business with Mexico due to significant supply chain integration and low transportation costs. Mexico’s flexible exchange rate regime would act as an automatic stabiliser and help the economy adjust to less favourable terms-of-trade. Mexico would also be aggressively pursuing trade agreements with other countries following NAFTA dissolution to offset some of its negative impact. 

Mexico is rated investment grade and has access to the IMF Flexible Credit Line. Its macro policy track record is strong. A flexible exchange rate will help Mexico absorb any trade shock.