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.
Japan-EU Trade Agreement – 1/3 of Global GDP Included
The EU and Japan have been building up a formal set of economic cooperation agreements since 1987. (Appendix 1). Today, the EU is the third largest trading partner of Japan, while Japan is the 7th largest trading partner of the EU. Both sides see significant economic potential for deeper cooperation, in terms of job creation and export revenue. However, absent free trade agreement (FTA), exporters still faced some substantial import duties and difficulties in compliance, particularly with standards. This prompted the establishment of JEEPA, the first FTA between the two parties. The commitment between the two to get this through is obvious. A large part of JEEPA negotiations was focused on regulatory issues or non-trade measures. Chapters are dedicated to addressing newer challenges of global trade like e-commerce, capital movements, intellectual property and corporate governance.
What to Expect? Benefits for Goods & Services Coming in EU-Japan
Broadly, we assess the usefulness of the Japan-EU Economic Partnership Agreement
(JEEPA) based on the breath and extent of tariff cuts, where we assume that better quality
trade agreements have steeper tariff cuts over shorter time periods. Looking at the tariff schedules of the two parties, Japan appears to be more conservative in cutting tariffs. Its tariff schedule has a longer phase out period of 20 years versus the EU’s, which 15 years. It also has more exclusions in its tariff schedule than the EU – various goods in 12 chapters are not covered, compared to 6 for the EU. Japan only agreed to eliminate tariffs for 62 chapters of goods upon entry into force (EIF) whereas the EU promised 67. Compared with the status quo, however, EU-Japan still provides some significant benefits for exporters in both markets. Tariff rates on specific products of key interest can be high and any reductions are likely to result in new market access for both.
Brexit to Topple the British Government?
It has been two years since the fateful Referendum of 2016, yet Brexit remains as divisive as ever. May, already damaged by a disastrous General Election in 2017, struggles to hold together a cabinet divided between “hard” and “soft” Brexit. Ministerial infighting has led to incoherent policies that have weakened both the UK’s negotiating position and its international credibility. The recent departures, especially that of Johnson – who commands a large following among the Tory faithful – have only worsened political instability, leading to rumours of a leadership challenge within the Conservative Party. Meanwhile, time for negotiation is fast running out: the 29 March 2019 Brexit deadline is less than a year away. While the announced deadline is March, the practical end date is even sooner, as the EU side needs time to approve the final deal. While a “soft Brexit” may not be ideal, a “no-deal Brexit” would be catastrophic. British agricultural and automobile exports could face EU tariffs of up to 40% and 10% respectively. Trade in services would also be adversely affected by a loss of passporting rights, which allow British businesses to sell services Europe-wide without having to obtain a license from individual members. Significant trade disruption would be also ensue as the UK replaces the EU Customs Union and various European regulatory agencies with local equivalents.
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.