Trump trade war

US-China Trade War: Still Grinding On

US-China Trade War: Still Grinding On

But the US-China trade war continues to grind on. While coronavirus takes the headlines, the economic damage from more than two years of trade hostilities between the two largest global economies continues to take a toll. Worse, US President Donald Trump appears eager to escalate the fight all over again for the rest of this year. Many people seemed to have stopped paying attention the trade conflict back when the Phase 1 “deal” was signed in January and implemented on February 14 (both dates seem like a lifetime ago already!). As we noted at the time, the Phase 1 deal was never likely to hold. The agreement had promises in a variety of areas from intellectual property rights to financial services. But the most important element was a promise to purchase goods. The US insisted that China buy $200 billion in products ranging from soybeans to energy in a two-year time frame. This target was never realistic. It was nearly double any previous purchases made by China for US exports and it was coming off extremely low export figures across the duration of US-China tariff escalation. The Phase 1 deal arrived just as the COVID-19 situation was taking off in China. With factories and shops shuttered across the country (and not just in Wuhan at the epicenter), Chinese imports from everywhere sagged. Meeting the series of purchasing targets went from impossible to never-going-to-happen. So what was the appropriate US response? There were two options available to Washington. First, to acknowledge that the scale and depth of the crisis made previous commitments unattainable in the short term and either recalibrate the expectations, adjust the target levels, or shift the timeline. Second, to complain loudly that China had failed to meet the purchasing targets and start the whole conflict all over again.

Making Tariffs Great Again and Again

Making Tariffs Great Again and Again

The latest batch of tariffs, however, are on items that are directly obvious to customers in stores, including clothing, shoes, phones, video games and practically every item on or under a Christmas tree.  Trump’s latest move is likely to have been a shock to most observers. In fact, I had bets going with a wide range of people that Trump would not make it out of August without imposing tariffs on the so-called “List 4” products.  Most argued I was crazy.  Trump, they said, would not escalate the trade war at this time.  He would most likely bide his time until next year, engaging in trade talks with China with just enough enthusiasm to say that he was working on the problem, but not enough to solve anything too soon before the election.  Voters can have short attention spans and an early resolution of the China problem would not give him an electoral bounce in November 2020. The List 4 hearings in Washington in mid-June involved hundreds of companies across seven days and nearly 3000 submissions.  Nearly all were united in arguing against more tariffs on China and about the damage to be done by imposing tariffs on the remaining products, which had been carved out of the previous tariff policies for good reasons.  But I thought Trump would ignore this advice.  Hearings in Washington took place already, clearing the way for the imposition of tariffs at any point. To expect Trump not to impose them was like asking a child not to play with an exciting new toy that has been placed within reach. 

Going Rogue on Trade

Going Rogue on Trade

There is no justification that allows a government to raise tariff levels based on immigration levels. To take such a step means that the United States has decided that it will no longer bound by international trade rules.  The early commentary on the Mexico decision has been nearly entirely focused on which companies in which sectors will be most at risk from an increase in tariffs by 5% on June 10, with additional increases monthly afterwards until every inbound product faces 25% tariffs by October 1.  Such a damage assessment is important for firms that suddenly awoke to find themselves in the front lines of a new trade conflict that they did not anticipate. But it misses the larger point—everyone is affected by this decision.  It is not just companies that ship goods from Mexico to the United States that should be paying attention.  If the US proceeds down this path, it is the end of the global trade regime that has given stability and lowered risks for an increasingly larger share of companies and consumers since the 1940s. 

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.

Another One-Sided Move on Last Mile Delivery

Another One-Sided Move on Last Mile Delivery

The United States, of course, is not Australia and has a customer base that is hard to ignore.  Marketplaces will likely continue to deliver, despite higher costs, but will pass along these higher postal rates to customers who will pay more. In the meantime, firms will search for alternative markets outside the US to continue to grow their businesses. Governments outside the United States may follow suit and withdraw from the UPU as well, leaving US exporters, including many of the most vibrant global e-commerce vendors, at risk of failing to reach their own customers in fast-growing overseas markets where last mile delivery is always the most challenging part of e-commerce for firms. Withdrawing the United States from the UPU may seem like a small victory for Trump, but the implications and collateral damage it could cause to American consumers and companies alike may be significantly more than the relatively minor amount Trump claims the US Postal service is currently forgoing.