The practical effects of the new U.S. trade policy are starting to emerge:
The country’s sole major producer of nails, based in Missouri, is paying more for raw materials due to new tariffs on steel and aluminum. It has lost “50 percent of its business in two weeks,” reports Alisa Nelson for Missourinet.
A Minnesota soybean farmer said “his farm value has lost around $250,000” in two weeks, according to CNN’s Dan Merica, after China targeted American soybeans in retaliation for those steel tariffs.
Harley-Davidson said it will start producing motorcycles outside the U.S. to avoid retaliatory tariffs from the EU, report the Washington Post’s David Lynch and Heather Long. The tariffs would add $2,200 to the average cost of each motorcycle.
One Wisconsin cheesemaker can no longer use the term “asiago” to describe its products for sale in Mexico, after the U.S. pulled out of trade talks that might defend those kind of brand terms. The company, Sartori, has resorted to branding its cheese with the money-losing name “Sartiago.” “The consumer doesn’t know what this is,” the company’s president told the New York Times’s Ana Swanson. “We can’t even put ‘used to be called asiago’ on the label.”
Today’s issue will catch you up on the trade wars. First, I’ll lay out the state of play: What tariffs have actually been imposed already? And which ones are still under discussion? And then I’ll walk through the differing strategies of the three key combatants.
A Tariff Snapshot
Reminder: Tariffs are a tax paid to the government when products cross the border.
What’s in effect now?
Steel and aluminum imports into the U.S. from any part of the world face either 25 percent tariffs (steel) or 10 percent (aluminum). Although these tariffs were justified on national-security grounds, they apply to major U.S. allies and trading partners, including the European Union, Canada, and Mexico, as well as China, Russia, and India. Select American allies such as Australia and South Korea were granted exemptions.
Washing machines and solar panels imported from any part of the world are subject to tariffs of 20 to 30 percent. The Trump administration argues that other countries are competing unfairly with American producers.
American trading partners have retaliated by imposing their own tariffs. According to Bloomberg’s Bryce Bashuk, “As of June 22, 2018, American farmers and manufacturers are subject to $1.8 billion worth of tariffs on up to $9.2 billion worth of U.S. goods in retaliation.”
What is coming soon?
A list of products from China will be subject to 25 percent tariffs starting July 6. The list initially targets $34 billion worth of Chinese goods, and could later rise to $50 billion. The starter list focuses on goods, like semiconductors, purchased mainly by businesses rather than consumers. These tariffs are grounded in a long-running dispute over China’s industrial policy, which, the administration argues, is intended to give an unfair edge to Chinese technology companies. More on that in a moment.
What is under discussion?
President Trump has ordered his administration to draft plans for $200 billion in additional tariffs on Chinese imports, should China retaliate against his new tariffs, and to consider adding another $200 billion on top of that. That would encompass nearly all Chinese exports to the U.S. and would likely affect consumers.
In addition to Chinese exports, the administration is reportedly weighing plans to sharply limit Chinese investment in the U.S, according to the Financial Times and other outlets. (The administration today denied this report.)
The Trump administration is considering whether to impose 25 percent tariffs on all cars and trucks imported into the U.S. The president has singled out the EU for these kinds of tariffs.
Key quote: What defines a trade war?
Here’s Yasmeen Serhan.
Marianne Schneider-Petsinger, a U.S. geoeconomics fellow at the London-based Chatham House, [said] a trade war requires two elements. “One is the tit-for-tat tariffs that set off a downward spiral of protectionism,” she said. Check. “The other element is that there is no more space for negotiations to potentially de-escalate the dispute.” It’s this element that’s missing so far.
How to Win Trade Wars and Influence Governments
A trade war is not an end in itself. As Trump has said, the point is to win: to persuade the other side to change its policies in a favorable way. That’s normal. What’s unusual is the number of countries the U.S. is in conflict with at one time. That’s led to a variety of strategies to fight the administration’s policies.
China: Tariffs Are Not Enough
President Trump’s China policy is focused, among other things, on lowering the trade deficit. At the moment, China sells more goods and services to the U.S. than it buys. “The United States hasn’t had a Trade Surplus with China in 40 years,” Trump said in a typical tweet. Trade surpluses and deficits aren’t how economists measure the health of the economic relationship—after all, American businesses are happy they sell lots of stuff to China. Nonetheless, the administration has fixed on tariffs as a key point of economic leverage with trading partners. “It is precisely because China has launched a sustained attack on America’s innovation base that Mr. Trump is imposing defensive tariffs,” wrote White House trade adviser Peter Navarro last week.
So will they work? No, argues Barron’s columnist Matthew Klein. China exports so much in part because its elites have built an economic model on the backs of Chinese workers. “China may be the workshop of the world, but the Chinese people cannot afford to buy what they produce. Instead, foreigners buy Chinese goods with money stolen from Chinese households by the Chinese government. Foreign workers are also victims of this arrangement, because their cheap goods come at the price of lost jobs and rising debt.”
Klein argues that tariffs won’t work “as long as China’s elites remain committed to extracting as much as they can from Chinese workers.” A better approach, he says, would be to focus on banning investment—which could be the next phase of the American approach to China. The Trump administration may soon limit Chinese investment in the U.S. That, Shawn Donnan writes in the Financial Times, “could have even greater long-term consequences for the economic relationship between the U.S. and China than the escalating tit-for-tat tariff war.”
Navarro and his allies are championing the view that China has a nefarious master plan to dominate world trade, encapsulated by Beijing’s official Made in China 2025 industrial plan. But, as Yuan Yang of the Financial Times argued recently on the Peterson Institute’s Trade Talks podcast, targeting the plan may backfire. “When the U.S. criticizes Made in China, for the Chinese side that’s heard as criticism of China having any industrial policy and any ambition to become a tech superpower, any ambition to reach beyond where China is right now and improve itself.”
By raising tariffs and other barriers to commerce with China, Trump’s advisers believe they will force Beijing to the negotiating table. There, concessions will be made on the real subjects of dispute: China’s espionage-led trade strategy. But as the Wall Street Journal reports, China isn’t taking this strategy lying down. “In the West you have the notion that if somebody hits you on the left cheek, you turn the other cheek,” President Xi Jinping reportedly said. “In our culture we punch back.”
Canada: Target the Corruption
Canadian officials have often seemed taken aback at Trump’s trade measures. “That Canada could be considered a national-security threat to the United States is inconceivable,” said Prime Minister Justin Trudeau. In response, Canada has turned to the trade-warrior’s favorite weapon: retaliatory tariffs. The goal of retaliatory tariffs, as we’ve written, is to put pressure on the other country’s politicians. “It’s routine for countries to pick and choose the kinds of sanctions they will apply depending on where key decision makers and industries are geographically,” Jim Bacchus, a former World Trade Organization judge, told The Masthead. Now Canada is following that playbook. According to Canada’s CBC news agency, tariffs on orange juice, for instance, target swing-state Florida, which Trump won in 2016.
But this approach may not work with the Trump administration. After Canada initially won exemption from Trump’s steel and aluminum tariffs, the Trump team decided to let the tariffs take effect anyway. A better strategy, argues former Canadian diplomat Scott Gilmore in Maclean’s, might be focusing on a defining characteristic of the Trump administration: its corruption. Canada’s laws and democratic traditions prevent it from simply bribing the president’s family, notes Gilmore. But it could treat the American president like any other corrupt world leader: by targeting his assets. “Trump, by refusing to give up his businesses, and by flagrantly violating the emoluments clause, has inadvertently handed us the perfect stick,” writes Gilmore. Canada could tax Trump properties, for instance. European allies could close his golf courses or issue travel bans for the president’s children.
Gilmore’s idea is radical, but if Trump is an abnormal president, and can’t be influenced by normal means, then other countries may consider abnormal steps in order to achieve their policy goals.
European Union: Beware of Bluffing
In addition to retaliatory tariffs, the Europeans are going a step further. They are filing a suit at the World Trade Organization against the Trump administration’s policies. Like Canada, the Europeans seem uniquely piqued by the notion that their metal producers would be dubbed a national-security threat. After all, many EU members are also formal military allies with the U.S.
The EU, perhaps even more than the U.S., requires strong, clear laws in order to make its way through the world. So a legal challenge at the WTO to American policy makes sense. But because of that reliance on the rule of law, the EU’s legal challenge is particularly risky. As I wrote in March:
The WTO, [U.S. Trade Representative Robert Lighthizer] warned last year, was “not designed to successfully manage mercantilism on this scale.”
The greatest danger to the trading system is that Lighthizer may be right. This latest move by the Trump administration, coupled with a separate demand from China, will severely test the WTO’s judicial system. Trump’s new tariffs are justified on the basis of a never-before-used national-security clause. If the WTO approves Trump’s tariffs on those grounds, there is little stopping other countries from protecting their industries on national-security grounds. If not, the U.S. may refuse to recognize the ruling.
WTO cases are often intended as a kind of bluff. The threat of an adverse ruling is meant to induce the warring parties to settle out of court. The danger for the EU is that the Trump team may call its bluff. As Shawn Donnan wrote earlier this year, the Trump administration pays lip service to valuing the World Trade Organization. But that “masks a deep scorn for the WTO. The current view in Washington holds that, what was once set up as a club for market economies to agree on rules to help them trade more with each other, has instead become a technocratic stronghold where dismantling some of the U.S.’s own trade defenses, such as its anti-dumping regime, appears to have become a primary goal.”
If the White House sees the WTO as enabling its adversaries’ economic objectives, then filing a lawsuit that could cripple the WTO is not the safest strategy. There is little the Trump administration enjoys more than baiting its opponents into overstepping, then making a feast of the ensuing crisis.
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