Trans-Pacific View

US-China Trade Relations: Impending Trade War?   

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Trans-Pacific View

US-China Trade Relations: Impending Trade War?   

Insights from William Perry.

US-China Trade Relations: Impending Trade War?   
Credit: Official White House Photo by Shealah Craighead

Trans-Pacific View author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy.  This conversation with William Perry International Trade Attorney at Harris Bricken and former attorney in the Office of General Counsel, U.S. International Trade Commission, and Office of Chief Counsel and Office of Antidumping Investigations, U.S. Commerce Department – is the 130th in “The Trans-Pacific View Insight Series.” 

Explain the impact of U.S. tariffs on solar panels on U.S.-China trade relations. Is this the opening salvo in an impending trade war?

Could be. On February 27, 2018, USTR [U.S. Trade Representative] Robert Lighthizer on the Laura Ingram show on Fox News stated that speculation of a U.S. China Trade War was “ridiculous.”  Yet, in response to Commerce’s decision to self-initiate an antidumping (“AD”) and (“CVD”) cases against aluminum sheet, the Chinese government has self-initiated AD and CVD cases against imports of U.S. sorghum grain worth $1.2 billion.  China is threatening an AD/CVD case against imports of $13.9 billion in soybeans from U.S.

The Solar 201 case directly benefits only two bankrupt U.S. producers, Suniva and Solar World. Both are owned by foreign companies, with Suniva owned by a Chinese company. There are 400 jobs at Suniva and Solar World, but 100,000s of jobs in U.S. downstream industries that are dependent on the solar cell imports. Those downstream industries will be hurt badly by the president’s decision.

But President Trump’s decision in the Section 201 solar case was predictable. The bigger question is what the president will do in the Section 232 steel case.

Explain potential consequences of U.S. tariffs on steel.

If President Trump decides to impose a worldwide tariff of 24-25 percent on worldwide steel under Section 232 on April 11, this could provoke a trade war with the world, not just China.  The EU has stated that they are drawing up retaliation targets, such as imports from the U.S. of Harley Davidson motorcycles and Jack Daniels bourbon. There is no accepted WTO definition of “national security” so if the U.S. can use the Section 232 provision to unilaterally levy tariffs on imports, the rest of the world can respond in kind.

Moreover, steel tariffs could have a devastating impact on downstream U.S. industries, which need the imported steel as a key raw material input. In one recent case, I learned that steel has become much more specialized because of the safety requirements of U.S. automobiles, but the U.S. steel industry does not make many different types of specialized steel.

There are 140,000 jobs at stake in the U.S. steel industry, but millions of jobs at stake in the downstream industries, such as the automobile industry, so this could have a devastating impact on the U.S. economy.

Section 232 steel tariffs could kill more U.S. jobs than they save.

How will these tariffs affect U.S. consumer prices?   

U.S. consumer prices will go up, but from my experience in Washington DC, Congress and the average American do not care if prices go up a few dollars at Walmart, even though increased prices could cause inflation.

In fact, recent polls show that the average American backs President Trump’s decision to levy tariffs on imports to protect U.S. industries.

What carries more weight in DC is the impact of trade restrictions on downstream U.S. industries and also the very real threat of retaliation against U.S. exports. Downstream industries and trade retaliation directly affect U.S. jobs. Half of all U.S. agricultural products are exported; one-third of Iowa corn is exported to Mexico. Increased tariffs and a trade war will injure American farmers the most, many in this state of Washington. In direct contrast to the U.S. economy as a whole, farm incomes are going down in large part because of trade disputes.

At Davos 2018 Alibaba founder Jack Ma said, “Don’t use trade as a weapon.” Your thoughts?

President Donald Trump disagrees. As I have observed,  Donald Trump looks at tariffs and trade as a weapon he can use to hit countries that disagree with the U.S. from the foreign policy point of view. He threatened countries with tariffs if they fail to take back the illegal immigrants that are sent back to pursuant to U.S. immigration policy, stating on February 4:

But if they don’t take them back, we’ll put sanctions on the countries. We’ll put tariffs on the countries. They’ll take them back so fast your head will spin. We’ll just tariff their goods coming in, and they’ll take them back in two seconds.

Trump also sees China as the one strategic opponent of the U.S. and, therefore, he wants to be very, very tough on China trade policy.  So, President Trump definitely intends to use trade as a weapon.

Assess the U.S. administration’s “America First” policy – are tariffs a tactic or tools of a broader strategy? Identify positive outcomes, if any.

As stated above, Trump sees tariffs as a tool to be used to equalize competition between the U.S. and foreign countries and to penalize foreign countries that disagree with U.S. foreign policy. Former USTR Robert Zoellick stated recently that Trump does not want free trade. He wants managed trade and that is why it will be very difficult for the U.S. to get any new free trade agreements with other countries.

Trump wants to use tariffs to equalize competition and reduce trade deficits. The only problem with that strategy is that Trump does not control the governments of foreign countries, such as China, Mexico, Canada, and the EU, who also want to make their countries great again. Those countries can retaliate against U.S. tariffs and trade actions, and they will do so.

Many Americans simply do not realize that the U.S. exported $2.4 trillion in goods and services in 2017, $1.6 trillion in goods, and that gives foreign countries many tempting targets to retaliate against.

There are two very positive developments by Trump. Trump and the Republicans in their tax bill have cut corporate taxes to 21 percent. This has created a manufacturing renaissance in the U.S. as many companies have moved production back to the U.S. Apple intends to repatriate $350 billion to the US, much of which it will invest in new production, which means jobs.

The only question is whether Trump’s protectionist trade policy will kill the golden goose of this huge increase in U.S. manufacturing and U.S. jobs.

In addition, there are noises from Trump, Vice President Pence, and Treasury Secretary Munchin of the United States trying to be back into the Trans-Pacific Partnership [TPP].  Twenty-five U.S. Republican Senators, many from agriculture states, recently sent a letter to Trump urging him to get back into the TPP. Finally, the real economic costs to U.S. industry and agriculture of not doing the TPP are becoming clearer, and the situation is not pretty.