China tariffs

US President Joseph Biden: Time for a “Reset” on Trade?

US President Joseph Biden: Time for a “Reset” on Trade?

If this disruption at the top were not impediment enough to pushing for new policies, it remains unclear exactly what both parties will want to accomplish, particularly on trade issues. Traditionally, Democrats have been more skeptical of trade. This stance has changed in line with American public opinion to be more receptive to trade as a potential force for good. But it remains unclear how the Democratic party will respond to specific trade initiatives. It is also uncertain how Republicans will approach trade. In the past, free trade was a key plank in the party platform. Donald Trump scrambled this approach and it is not obvious how the Republican party will choose to address trade in the coming few years. Getting clarity inside both parties will take time. Trade, in general, is not going to be the key priority. Instead, expect Biden and the incoming Congress to focus significant time and attention on a host of domestic policy items including handling the escalating pandemic and economic fallout from disruption. There are two specific trade issues that will likely come up first: China and the CPTPP.

Trade War Escalates Again: $200 Billion Announced by Americans

Hence, writes Lighthizer, the need for another $200 billion in products on today’s list.  Why?  Because China cannot respond in the same measured way to a trade escalation of this magnitude.  China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar. Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. This line of argument, however, remains deeply flawed for at least four reasons. First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate.  They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts.  These include targeting US services, US companies on the ground in China, US investments and so forth. 

$34 Billion + $34 Billion = More Than Just Rhetoric

Now that tariffs have been imposed, negotiations have not started.  Instead, Trump seems determined to continue to escalate.  Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion. Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes.  It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. China could respond in many ways.  It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now.  It could much more rigorously check for compliance with every regulation, type of paperwork and so forth. 

The Silver Lining? Emerging Markets in Times of Troubled Trade

EMs could see a rise in exports in some sectors. Agricultural producers in EMs could stand to gain from China's counter attack to impose a 25% tariff on American farm commodities. The U.S., being the biggest exporter of cotton and soybeans to China and the world, will be greatly affected. However, this means that EM producers have a chance to play. China has already sought alternative sources of cotton months, in preparation for a possible trade war. India, the world’s second-biggest cotton exporter, has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in the rare advance deal.  India’s total cotton exports for this season is expected to be up 20%, to 7 million bales. China has also turned to other sources of soybeans, which is integral to make animal feed. It is likely to buy more from the other three top exporters – Paraguay, Argentina and Brazil. China’s share of South America’s regional soybean exports is expected to increase to 90% from June to December this year.