Section 301

US Trade Policy Under Biden: More of the Same

US Trade Policy Under Biden: More of the Same

United States Trade Representative (USTR) Katherine Tai gave what was billed as a major speech at CSIS outlining US trade policy on October 4. A careful review of China policy has been underway for months and Tai’s speech was to deliver the results of this study. At the end of her prepared remarks and a short round of questions, observers were left with few clues about the future trajectory of US policies and little detail beyond broad brush strokes already sketched over previous months. What was made clear is that US trade policy, in practice, is not likely to look substantially changed from paths pursued by the previous Trump administration. In fact, if Tai’s speech were read alongside similar policy statements made under the Trump team, it would be difficult to pick out who said what. First, Tai argued that China has failed to follow appropriate actions or adjust its bad behavior despite a long history of engagement. The approach used under the Trump administration, in particular the Phase 1 agreement, may not have been exactly the model she would have chosen (what model she might have thought more suitable was not discussed), but it remains in place. Tai did express distain for the term “Phase 1,” even as she essentially promised to follow it. Tariffs will continue to be imposed on Chinese imports, although the administration will restart the process of reviewing requests for exclusion. With limited details available on the process, however, it is unclear whether tariffs will be waived in large part, or only in limited circumstances. Nor was there any clarity on how long the process may take to conclude. Given the relatively limited time “left” on the Phase 1 agreement, even a short delay may deliver only modest benefits to US firms struggling to manage tariffs of up to 25% which have now been imposed, in some cases, for years.

Mexico Solved? Not So Fast…Significant Damage Remains

Mexico Solved? Not So Fast…Significant Damage Remains

The net result, for Trump, is that he did what he wanted and it worked.  Flush with this victory, it is highly likely that Trump will double down on his strategy in the future.  After all, he will reason, his advisors argued against his Mexico gamble and yet it paid out so well for him.  Why, then, should he listen to them if they advise against similar trade and tariff policies again? Trade is now a tool to be used for non-trade objectives, as we have noted previously.  While clearly illegal, such a distinction does not matter.  Trump was willing to impose tariffs on Mexico in direct contravention of existing World Trade Organization prohibitions, NAFTA rules and the upcoming NAFTA 2.0 rules.  He used a dubious interpretation of the American emergency powers act to justify his decision domestically.  The gloves, so to speak, are clearly off.  And, having won a big match in this way, there is every reason to believe such tactics will be tried again.  Future opponents should be forewarned. 

A World Without the WTO

A World Without the WTO

Companies have forgotten how much the global trade regime matters to daily firm operations.  If it did, in fact, collapse, the result would be a disaster.  The global trade rules are like air.  They have existed for so long that companies and consumers take them for granted.  They don’t even notice them any longer.  But, like air, if it suddenly went away, firms and consumers would discover to their great dismay that they actually like and need air (or the global trade system) very, very much. Why do firms need the WTO?  Start with the obvious issues.  Right now, 164 countries are constrained in what they can do with tariffs rates.  Up until this past year, WTO members did not just randomly hike tariffs overnight.  Keeping tariffs consistent has allowed firms and customers to have stability and reduce risk.

How Not to Win a Trade War

Arbitrary or capricious rule changes are a significant danger for foreign firms looking to diversify out of China into other markets in Asia.  It certainly does no good to open a new warehouse or building, only to have a regulatory change that renders it unusable or be saddled with new requirements on staffing that drive costs into the red. Most of the markets in the region that are currently expecting to capitalize on the trade war struggle with at least some—and usually all—of these problems.  An honest assessment of market conditions in hopeful “winners” could bring about some necessary changes.  There is certainly an opportunity for many markets to capture new gains from trade in areas that have not been “in play” for years.  But absent some significant improvements in the ease of doing business in a remarkably short period of time, many of the locations that expect a windfall from relocations are likely to be bitterly disappointed.

Where Are We in Global Trade?

This has been an interesting, mixed, two weeks in trade.  On the one hand, the system continues to receive new shocks, particularly from US President Donald Trump.  On the other hand, trade integration is also moving forward.  The net result continues to highlight the increasingly unsettled global environment.  Firms need to focus on how to mitigate the risks facing their business operations.
Let’s start with the bad news. Two separate hearings have wrapped up in Washington.  The first focused on product categories for an additional $16 billion in 25% tariff rate hikes against goods coming from China. Regular readers may recall that the Americans first produced a list of items totaling $50 billion for new tariff increases.  The list was revised on the basis of hearings.  The first $34 billion in tariffs have already gone into force (and were met with retaliation by China on a similar amount).  But $16 billion in products were contested, resulting in a new list from the USTR. Now that hearings on the revised list of products has been completed, tariffs can be imposed at any time.  Expect them to be announced on Friday (since this seems to be the preferred approach of the Trump administration).  These new Section 301 tariffs will likely be met with $16 billion in matched retaliatory tariffs by China.