Running out the clock on a temporary exemption, the Trump administration moved ahead on June 1 with a 25-percent tariff on steel and a 10-percent tariff on aluminum on imports from Canada, Mexico, and the European Union among other significant producers.

Tariff wars take on the dynamic of an arms race. Countries build up an arsenal by amassing lists of products where additional tariffs would make a serious dent in the other country’s exports and often include products that are manufactured in the districts of key politicians to get their attention. Fully armed on both sides, countries most often back down or repeal the new tariffs quickly, given the possibility of mutually assured destruction (no need for a bunker on the trade front but there will be direct costs to producers and consumers).

There is plenty of collateral damage in a tariff war because the one-upmanship spills over beyond the sectors named in the original complaint (steel, aluminum, solar panels, washing machines, autos), sweeping in producers like farmers for maximum political effect. The other dirty little secret in tariff wars is that they provide cover for governments to protect the producers of products facing normal market competition. That’s what might just be motivating our closest trading partners to put American whiskey on their lists for tariff retaliation.

I’ll Take (a) Manhattan

Last year, American makers exported $1.6 billion worth of distilled spirits – 69 percent of those sales were of American whiskies. American spirits are sold in some 130 countries. Canada, the UK, Australia, Germany, and Spain buy the most. Is it possible that Canadian, Scottish, and Irish distillers or the black corn-based Mexican whiskey producers see an opportunity to leverage this tariff war to slow down the explosive growth of American whiskies around the world?

The industry’s top objective for NAFTA re-negotiations was a defensive one: preserve duty-free treatment for US distilled spirits exports. But now, in response to new US tariffs on steel and aluminum imports from Canada and Mexico, both governments have released a list of US products against which they intend to apply tariffs. Mexico’s list is comprised of $3 billion in tariffs and includes US pork products, apples, cranberries, cheese, potatoes—and whiskey.

Canada has said it will raise tariffs to 25 percent on nearly $13 billion worth of US exports. Its list includes yogurt, coffee, candy, maple syrup, jams, nuts, ketchup—and whiskey. Europe was not exempt from the steel and aluminum tariffs either. In response, Europe’s list of around 200 American goods that might face a 25 percent tariff includes orange juice, corn, tobacco, rice, beans, peanut butter—and whiskey. China is of course at the center of US complaints on steel and aluminum. China’s list of tariffs on US goods includes soybeans, corn, cotton, sorghum, wheat, beef, dried cranberries, orange juice—and whiskey.

That’s the spirit

Putting together retaliatory tariff lists is an arcane art form in the trade policy world. It’s two parts economic analysis and one part just “hit ‘em where it hurts.” Once you start a tariff war, you cannot contain which of your prized industries will get caught in the crosshairs. This time, it’s sure to be American whiskies.

American author Bernard DeVoto wrote in The Hour, “In the heroic age our forefathers invented self-government, the Constitution, and bourbon…Our political institutions were shaped by our whiskeys…and share their nature. They are distilled not only from our native grains but from our native vigor, suavity, generosity, peacefulness, and love of accord.”

We will need to draw on these values and characteristics to get us—and our whiskies—through this tariff war as quickly as possible.

Andrea Durkin is the editor-in-chief of TradeVistas and Founder of Sparkplug, LLC. She is an adjunct fellow with CSIS and a non-resident senior fellow at the Chicago Council on Global Affairs.

This article originally appeared on TradeVistas.org. Used with permission.

The average American generates 4.4 pounds of solid waste every day. The garbage and recycling trucks come faithfully each week, but we don’t pay much attention to where it all goes. According to the Institute of Scrap Recycling (ISRI), approximately one-third of the scrap recycled in the United States is exported. China is our largest customer.

Recycling is a global industry. 179.6 metric tons of scrap commodities worth $86.5 billion were exported globally in 2015. Ferrous, non-ferrous (copper and aluminum), and precious metals are among the most valuable and highly traded waste. Shipping these non-hazardous scraps for recovery in another country can extend the life of scarce natural resources that might otherwise end up in local landfills.

Why do other countries buy it?

ISRI calls scrap recycling “the first link in the global manufacturing supply chain.” Take the case of China, the world’s largest importer of scrap commodities. For years, cities such as Foshan in southern China have enabled 24-hour a day scrap operations where workers sift, sort, break down, and process metals to feed China’s extended construction boom. The recycled metals find their way into new rail systems, gleaming skyscrapers, automobiles, industrial machines, and other infrastructure needed to support a modernizing country and satisfy the appetite of a newly affluent and growing middle class. China does not have enough of natural resources to meet demand and secondary raw materials recycled in China are often cheaper than virgin materials.

Adam Minter is a journalist based in Shanghai who has spent over a decade studying China’s recycling industry up close. He gives this example in his book, Junkyard Planet:

“In 2012, China produced 5.6 million tons of copper, of which 2.75 million tons was made from scrap. Of that scrap copper, 70 percent was imported with most coming from the United States. That’s not a trivial matter: Copper, more than any other metal, is essential to modern life. It is the means by which we transmit power and information.”

Scrapping plans for “foreign garbage”

In July, China notified WTO members of a change in policy. As of the end of this year, China will ban the importation of 24 categories of solid waste including tires, textiles, plastic, and glass, and it will limit the importation of other waste such as steel, copper and aluminum scrap.

The US scrap industry shipped more than 37 million tons worth $16.5 billion to customers worldwide in 2016. One third of that went to China. ISRI says that more than 155,000 Americans are employed in the US recycling industry, which depends heavily on exports to China. Recyclers in the European Union, Canada, Korea, and Australia are worried about the ban as well. Their representatives to the WTO raised questions about China’s policy at the most recent meeting of the WTO’s Committee on Import Licensing.

Recycling good trade practices

As China implements procedures to monitor and control the importation of waste, it will need to be mindful of its commitments under the WTO Agreement on Import Licensing. The obligations in the agreement are designed to ensure that any procedures used to administer import licenses are “simple, neutral, equitable and transparent.”

The agreement’s disciplines require members to publish and notify new or changed import licensing procedures to other WTO members, to apply simplified procedures without discrimination, and to process import applications within reasonable time limits. The agreement also specifies best practices such as streamlining the number of agencies whose approval is required, and not refusing applications if minor documentation errors are made by exporters without fraudulent intent or gross negligence. These are nitty gritty operational matters that can significantly disrupt exporters’ businesses if not handling transparently and fairly.

Trash talk can be beautiful

The WTO’s import licensing committee meets about twice a year. Members can ask questions and seek clarification about draft laws and import procedures. Why is the measure needed? How will it operate? In this case, China did provide notice and several WTO members queried the representatives from China about the scope and application of its ban. At the same meeting, members asked Indonesia about its dairy import licensing regime; Vietnam said it was taking measures to respond to concerns about discriminatory aspects of its import licensing for distilled spirits. Mauritius, Moldova, and Botswana filed their first notifications.

Publication and transparency are good administrative habits, reinforced by the WTO’s rules. It helps to avoid trade disruption and strengthen domestic processes that promote inclusion in public rulemaking. The committee discussions shine a light on poor procedures, putting peer pressure on countries to apply better practices while offering training and good examples for countries with burgeoning regulation to follow. Importantly, however, the process is only as good as members’ compliance with the requirement to provide timely notification of measures to their trading counterparts, which has been something of a problem in this and other WTO committees. But those flaws should not overshadow the overall opportunity the WTO provides for countries to have regular, ongoing discussions about their trade regimes in a peaceful and civil environment.

What will happen to the garbage?

After December, China may no longer accept waste paper or plastic. Today, China buys over half of the plastic thrown away by the rest of the world and has become the world’s largest paper recycler. The China Paper Association says one quarter of the paper produced in China is made from imported waste paper. The ban will have implications for companies like Amazon and Alibaba that fill millions of orders comprised of products made from recycled materials and packaged in recycled materials. There will certainly be ripple effects that cause price and supply uncertainty.

When economists look at the negative externalities generated by trade in waste, they might cite differences between countries’ pollution policies as driving trade flows. To address environmental externalities the “first-best policy” in economic circles would be to establish appropriate domestic regulation or tax policies. Alternatively, a country might restrict the importation of waste. The Chinese Government cited health environment and health concerns but most of the waste feeding China’s massive and inadequately regulated recycling industry comes from domestic sources.

Where will the world’s exported waste go if not to China? Trade barriers often have the same effect as squeezing one part of a balloon. Trade flows clamped off in one area causes them to swell in another. If there’s demand, high-quality waste will be redirected to other countries. If not, it goes to the landfill.

Andrea Durkin is an adjunct fellow with the Center for Strategic and International Studies and a non-resident senior fellow at the Chicago Council on Global Affairs. 

This article originally appeared on TradeVistas.org. Used with permission.

Behind its rhetoric, the North Korean regime understands that its goal of economic self-sufficiency is not feasible and has produced poor outcomes. North Korea’s relatively closed economy ensures the majority of North Koreans remain food insecure, poor, and cut off from the rest of the world.

North Korea’s leaders have made allowances for limited market-based activity in light industry and agriculture, stimulated by economic relations with China and investments by Chinese firms. But North Korean dictators want China’s investment, equipment, and technology without introducing individual economic freedom. In 2009, fearing too much individual wealth was being created, the Kim regime confiscated household income by reissuing its currency at a fraction of its previous worth. While impoverishing its population, the regime simultaneously covets imported luxury goods to keep itself happy and a small number of elites loyal.

More significant than these personal indulgences, the regime continues to amass missile and nuclear technologies, through a combination of global licit and illicit transactions. North Korea trades for currency, for fuel, and for military materiel to preserve its power.

North Korea Depends on China for Trade and Investment – What Does China Gain?

North Korea is a political pariah, but only in recent years did more countries clamp down on trade with the rogue state. As North Korea’s trade with these secondary partners steeply declined, China significantly expanded infrastructure to facilitate trade with North Korea, building bridges, a new port, and duty-free zones to cover about half of its 850-mile shared border with North Korea. In 2015, China opened a high-speed rail route between Dandong and Shenyang, which moves North Korean coal to China’s northeastern Liaoning province. While the numbers are specifically unreliable, the general trade trend is clear. In 2009, China accounted for roughly half of North Korea’s imports and took one quarter of its exports. In 2015, China absorbed 83 percent of North Korea’s exports and accounted for 85 percent of North Korea’s imports.

Who Trades With North Korea

During this time, South Korea and North Korea engaged in shared production inside the Kaesong Industrial Complex along the border where more than 120 South Korean firms employed over 50,000 North Korean workers to make socks, wristwatches, school uniforms, and other goods. By early 2016, North Korea’s unabated rocket testing prompted South Korea to shut down the complex and cease economic activity. Eliminating the nearly $2 billion in trade from the Kaesong Complex, China now accounts for around 93 percent of North Korea’s total trade volume. According to data from the Korea Trade-Investment Promotion Agency, North Korea’s trade with China may have peaked in 2014, yet it still grew about 6 percent in 2016.

China-North Korea Trade

Chinese investors also provide almost all of the foreign direct investment in North Korea, mostly targeted to the development of mineral resources that help fuel the Chinese economy. For example, in Musan, North Korea, Chinese investment drove development of the largest open-cut iron mine in Asia. North Korean coal, iron ore, and other raw materials help China meet its energy demands.

More generally, China’s trade relations with North Korea, combined with outright economic assistance, serve its objective of preserving stability in North Korea, avoiding the kind of collapse that could produce mass migration of North Koreans into China. As a Congressional Research Service report puts it, “China’s food and energy assistance can be seen as an insurance premium than Beijing remits regularly to avoid paying the higher economic, political, and national security costs of a North Korean collapse, a war on the peninsula, or the subsuming of the North into the South.”

What Does North Korea Export and Import – and How?

North Korea has been under some form of United Nations sanctions since 2006. The sanctions are intended to embargo arms sales and related financial transactions with North Korea and prohibit trade in items related to nuclear, ballistic missiles, and other weapons of mass destruction. Sanctions also restrict the export of luxury goods to North Korea and encourage governments to freeze the assets of designated persons and entities engaged in such transactions. But China did not concur with all of the UN sanctions, nor has it fully implemented those it did approve.

In the realm of licit trade, North Korea’s importation of agricultural and aquaculture technologies has helped it increase output of cultivated fish, grains, and livestock such that it now exports fish, seafood, and agro-forest products. Textiles comprise a larger component of North Korea’s exports with garments sewn in North Korea but finished in China or elsewhere in order to carry a label from that country. North Korea has also leveraged its natural resource assets by acquiring the equipment necessary to improve output of mining and coal production, which is more lucrative for earning the cash it needs to support its military ambitions.

What Does North Korea Export?

Not reflected in official statistics is hundreds of millions in illicit trade North Korea engages in, selling small arms, light weapons ammunition, and minerals and metals prohibited under UN sanctions. North Korea can use air and land routes over China to engage in illicit trade with third countries when China fails to monitor or looks the other way. High profile interdictions of North Korean ships (often using flags of convenience) reveal secret cargo containing rocket-propelled grenades, anti-aircraft missile systems, and other materials sought after in war-torn countries like Syria and the Democratic Republic of Congo, Sudan, and Eritrea, according to UN reports. Organizations monitoring the flow of goods into North Korea cite evidence of Chinese companies serving as the front for North Korea’s purchase of goods prohibited under sanctions.

China Dependency — Closing the Spigot Through Sanctions

Notably, both China and Russia joined a stronger UN resolution passed in August that prohibits the purchase of North Korean exports of coal, iron, iron ore, lead ore, and seafood, which together earned North Korea some $1.5 billion in revenue from exports to China in 2016.

Under a related Executive Order, President Trump gave the US Treasury Department authority to target anyone engaged in “at least one significant importation from or exportation to North Korea of any goods, services, or technology… or anyone who materially assists such economic exchanges.” Treasury Secretary Mnuchin put it this way, “Foreign financial institutions are now on notice…they can choose to do business with the United States or North Korea, but not both.”

North Korea Secondary Trade Partners

As commercial transactions with North Korea’s secondary trade partners have significantly declined, the determining factor in how effective the new sanctions are is North Korean economic relations with China.

For many years, Beijing’s coal purchases helped to pay for the North’s nuclear weapons program. China imported $1.2 billion in coal and mineral fuel from North Korea in 2016, but announced in February 2017 it would temporarily suspend coal imports from North Korea, citing concerns that North Korea would fail to make payments. Monitoring of shipments into China show that the suspension is being enforced, but North Korea persists in finding ways to reroute its coal exports through other countries in the region such as Malaysia and Vietnam, according to UN reports.

The Ultimate Question: Will Sanctions Prevent North Korea from Becoming a Nuclear Power?

Critics of the new tougher sanctions also say they don’t go far enough. North Korea sends its people to work in shipyards, in construction, on farms, and in clothing factories in Russia and other countries throughout the Middle East and Africa as “guest workers.” They are mandated by the Kim regime to send back most of the money they earn in the form of remittances. The UN estimates that 60 to 80 thousand workers could bring in as much as $500 million a year. The new sanctions encourage countries to stop taking new workers but they do not prevent remittances.

Critics argue that two other even more significant avenues need to be shut down to make sanctions effective. China could deal a serious blow to North Korea’s weapons programs by withholding shipments of oil and other petroleum products since North Korea is almost entirely dependent on China for crude oil. The United States is also considering implementing “secondary sanctions” that would penalize Chinese and other banks that help finance the companies that front for North Korean purchases.

Whether these approaches are implemented or not, the Kim regime may not feel the impact of new sanctions in the near term. Many observers believe North Korea has stockpiled resources and earnings accrued from previous sales of newly prohibited goods. They worry that evasion remains viable for North Korea despite the expanding scope of sanctions, and that little will deter Kim Jong-un, the current leader of North Korea’s regime, from pursuing the nuclear capabilities that he believes are key to preserving power.

Andrea Durkin is an adjunct fellow with the Center for Strategic and International Studies and a non-resident senior fellow at the Chicago Council on Global Affairs. 

This article originally appeared on TradeVistas.org. Used with permission.