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Maybe Trade Wars Aren’t So Easy To Win After All

Maybe Trade Wars Aren’t So Easy To Win After All

“Trade wars are good, and easy to win.” — Donald Trump, March 2, 2018

“We don’t want to fight, but we are not afraid to fight and, given no choice, we will fight.” — Official statement of the government of China, May 6, 2019

If trade wars are easy to win, why hasn’t Trump won this one? It’s been going on for more than a year and he just escalated it by announcing that tariffs on $200 billion worth of Chinese imports would go from 10% to 25% on May 9.

A week ago, the two sides were to meet in Washington for what was expected to be the final round of negotiations. They were that close to a done deal. But then, Trump accused the Chinese of reneging on commitments they had made – the Chinese denied it – and the battle was rejoined.

China fired back by announcing that it would hit $60 billion worth of U.S. imports with tariffs ranging from 5% to 25% on June 1.

This led the Trump administration to roll out the big guns: it said it would impose 25% tariffs on all remaining Chinese imports “shortly.” That’s about $300 billion worth of goods.

But not to worry, Trump said. The U.S. tariffs would be paid “largely” by the Chinese. This is false. The tariffs have been and will be paid almost entirely by American businesses and consumers.

U.S. Sen. Tom Cotton, R-Ark., acknowledged this on Monday during an appearance on CBS This Morning.

“There will be some sacrifice on the part of Americans, I grant you that,” he said. “But also, that sacrifice is pretty minimal compared to the sacrifices that our soldiers make overseas that are fallen heroes or laid to rest.”

American soybean farmers who have filed for bankruptcy protection because the trade war has cut off their access to China, their largest market, will no doubt take comfort in Cotton’s rationale.

The trade war has yet to visit more than minor damage on the U.S. or Chinese economy. But if it does, China will be better able to mitigate harm than the United States will be, because “the government plays a much bigger role in the economy” than the U.S. government does, said Brad Setser, an economist at the Council on Foreign Relations.

For example, communist China can pump stimulus money into the economy much more easily than the United States can. It was doing that until 2018 and “China’s economy was slowing of its own accord when the (U.S.) tariffs were introduced,” Setser said. “I think there wasn’t much of an impact from the tariffs in 2018, but you definitely see a slow-down in 2019.” Consequently, “China went back to some of its stimulative policies,” he said.

Trump, on the other hand, doesn’t believe in government intervention in the economy.

China has other tricks up its sleeve, some of which it has already used; it has strategically deployed its tariffs in states and congressional districts whose voters favored Trump in 2016. More of the same can be expected when China’s next round of tariffs takes effect.

China can use any number of non-tariff barriers against U.S. imports, such as slow-walking customs approvals at the border. Of course, the U.S. can do this, too, but not without a lot of loud squawking by affected businesses and their elected representatives, all of which would be reported in the press.

China can withstand a prolonged trade war for longer than the United States can. There is no independent press there and its communist leaders don’t have to worry about getting re-elected.

America’s leaders do, so Trump announced on Monday that he would be throwing more money at “our great patriot farmers” who have been hurt by the trade war.

“Out of the billions of dollars that we’re taking in (from tariffs), a small portion of that will be going to our farmers,” he said.

This will be the second round of payments to farmers, most of whom voted for Trump in 2016 but are now losing patience with his trade war. They don’t want hand-outs; they want their foreign markets re-opened.

Trump is all about winning, but when this trade war ends, it’s hard to imagine how he’ll be able to legitimately say that he’s won it. It will be a Pyrrhic victory at best.

John Brinkley was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.

This article originally appeared on Forbes.

ITC Report on NAFTA Revision Doesn’t Impress Democrats

President Trump got a gift from the U.S. International Trade Commission Thursday – a mostly positive assessment of the probable economic effects of the US-Mexico-Canada Agreement, formerly NAFTA.

That won’t appease congressional democrats, though. They’re concerned about the extent to which the USMCA’s rules on labor and environmental protection would be enforced. And there’s not much in the agreement to assuage them.

“USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world,” the ITC said in a 379-page report.

“[T]he agreement would likely have a positive impact on all broad industry sectors within the U.S. economy. Manufacturing would experience the largest percentage gains in output, exports, wages, and employment, while in absolute terms, services would experience the largest gains in output and employment,” the report said.

It predicts nominal gains in employment and GDP, which is the most that one can expect from any trade agreement.

While not explicitly saying so, the report strongly suggests that the agreement’s benefits will only be realized if its rules are enforced.

“If fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment,” the report said.

Caveats like that appear throughout the report:

– “The agreement, if enforced, would strengthen labor standards and rights.”

– “The Commission assesses that full implementation and enforcement of the IPR (intellectual property rights) chapter’s provisions would benefit U.S. industries that rely on IPR protections.”

– “Overall, labor organizations and other observers express the view that USMCA labor obligations will have no impact on wages or labor conditions if member countries fail to enforce these provisions. Despite the agreement’s new and strengthened labor provisions, some groups criticize the agreement’s lack of measures guaranteeing the enforcement or monitoring of its labor obligations.”

– USMCA holds that “parties must enforce their environmental laws, while also retaining the right to exercise discretion with respect to enforcement of those laws.”

Now there’s a loophole you could drive an 18-wheeler through; sure, we’ll enforce our environmental laws, subject to our discretion. It’s glaringly obvious how much enthusiasm the Trump administration has for enforcing environmental laws and regulations – none whatsoever. Dozens of environmental regulations imposed during the Obama administration have been put off or repealed – all for the benefit of business and industry.

And business and industry liked what they saw.

“This comprehensive analysis shows that all broad industry sectors across the U.S. economy will benefit from USMCA,” the Business Roundtable said in a statement.

“[M]embers of Congress reviewing the ITC report and considering their vote on USMCA should look at the big picture. Liberalized trade with Canada and Mexico has been tremendously important to the U.S. economy,” the U.S. Chamber of Commerce said before the report was released. “A vote for USMCA is a vote to continue these far-reaching benefits. To recap, U.S. trade with Canada and Mexico.”

U.S. Sen. Ron Wyden, D-Ore., the ranking democrat on the Senate Finance Committee, said, “This report confirms what has been clear since this deal was announced – Donald Trump’s (USMCA) represents at best a minor update to NAFTA, which will offer only limited benefits to U.S. workers. As I’ve said for months, the administration shouldn’t squander the opportunity to lock in real, enforceable labor standards in Mexico and fix the enforcement problems that have plagued NAFTA.”

The Finance Committee has jurisdiction over U.S. trade policy, as does the House Ways and Means Committee. It’s chairman, Rep. Richard E. Neal, D-Mass., said it was “notable that the Commission consistently highlights the inclusion of enforcement provisions as the key factor in determining whether labor standards and rights will actually be strengthened in Mexico.”

“Before the release of the ITC report, I believed that the renegotiated NAFTA, as written, needed to be improved before House consideration. Nothing in this report alleviates those concerns,” said Rep. Earl Blumenauer, , D-Ore., chairman of the Ways and Means Trade Subcommittee. The House requires stronger provisions on labor, the environment, access to medicine and enforcement.”

NAFTA has no chapters on labor rights or environmental protection. They are addressed in side agreements that are only marginally enforceable. USMCA negotiators agreed to move those side agreements into the body of the agreement and to make them fully enforceable. But there’s a big difference between “enforceable” and “enforced.” Enforcement costs money, and in some cases it’s difficult to do.

For example, USMCA stipulates that at least 40% of a car built in Mexico be built by workers earning at least $16 per hour. Good luck enforcing that.

In order to add enforcement language to USMCA that will satisfy congressional democrats, U.S., Canadian and Mexican negotiators would have to reopen the negotiations and spend weeks or even months hashing it out. That’s not going to happen.

What will happen is that Trump, now in re-election mode, will claim that he transformed what he once called “the worst trade deal in the history of the world,” into what now says is “the largest, most significant, modern, and balanced trade agreement in history.”

Hyperbole aside, Congress still has to approve USMCA and that is far from a foregone conclusion.

John Brinkley was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.

This article originally appeared in Forbes.

2020 Democratic Candidates Won’t Find It So Easy To Be Anti-Trade

Maybe this time around, a Democratic presidential candidate will have the courage to be honest about trade.

Hillary Clinton supported free trade in general and the Trans-Pacific Partnership in particular until she ran for president in 2016, when she made the cold political calculation that continuing to support the TPP would result in a net loss of votes. So, she ran away from it though it were radioactive.

You may remember seeing delegates at the 2016 Democratic Convention holding signs that said “TPP” with a red line through it.

Bernie Sanders kept carping about “job-killing trade agreements” during his 2016 campaign, but never said which trade agreements he was talking about or what jobs they had killed. That didn’t matter to his followers, who thought everything he said was prophetic.

In many parts of the country, particularly Appalachia and the Midwest, it’s a lot easier to go with popular sentiment and blame NAFTA for the decline in manufacturing jobs than it is to explain to voters why that’s not true. A candidate would have to explain that jobs started migrating to Mexico three decades before NAFTA took effect; that U.S. manufacturing jobs peaked at 19.5 million in 1979 and had fallen to 17 million in 1994, when NAFTA took effect; and that they increased in number for the remainder of that decade. That takes time and requires the use of statistics that bore people. Moreover, if someone believes something strongly, he or she will continue to believe it even in the face of proof that it’s wrong.

Anti-trade politicians don’t use statistics, because there aren’t any that bolster their argument. Instead, they use evocative imagery that elicit an emotional reaction – pictures of closed factories with broken windows and weeds climbing the walls, abandoned communities, welfare lines.

Well, things have changed. It used to be that Republicans supported free trade in much larger numbers than Democrats. But as the 2020 election cycle gets under way, polls show that Democratic voters are more open to trade than they used to be.

Gallup poll conducted in early February found that 74% of Americans saw foreign trade “as an opportunity for growth.” Three years earlier, the same question had gotten a 58% positive response rate.

An NBC/Wall Street Journal poll in July 2018 found that 50% of Americans thought trade “has helped the United States.” That was up from 31% in June 2016.

These polls and others have found that a plurality of Americans think increasing tariffs is bad for the United States, that President Trump’s trade policies in general are bad for the U.S. economy and bad for respondents’ “personal financial situation.”

Nowadays, it’s President Trump and his followers who think the U.S. had gotten the short end of the stick on trade policy. They think the poor little United States has been bullied by the likes of Mexico, Canada, the European Union and China.

Sanders also has the distinction of agreeing with Trump, whom he despises, on trade policy. Trump even said so.

“I like Bernie. He is the one person that, on trade, he sort of would agree (with me) on trade. I am being very tough on trade. He is tough on trade,” Trump said last month.

That’s probably the last thing Sanders wanted to hear.

It will be several months before the 2020 presidential race gets going in earnest. In the meantime, the Peterson Institute for International Economics has published a guide to how each of the announced and expected-to-announce democratic candidates stands on international trade. You can see it here.

Oh, and one other thing: Go UVa!

About the author

John Brinkley was a speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement

This article originally appeared in Forbes.

Trump’s Tariff War Doing The U.S. More Harm Than Good

Freshman economics students learn about the law of unintended consequences, which is that government actions and policies have unintended effects.

President Trump’s import tariffs would make a good case study, because they’ve had enough unintended effects to qualify for the Guinness Book of World Records.’

Trump, AKA the tariff man, likes to point out that tariff revenue has been pouring into the government’s coffers. In fiscal 2018, it came to $41.3 billion, according to the Treasury Department. That is less than one percent of all federal revenue for that year, and about 5% percent of the federal budget deficit, which was $779 billion – a 17% increase from fiscal 2017.

Moreover, $41.3 billion is only slightly more tariff revenue than the government took in in each of the three previous fiscal years.

Trump, as is well-known, also likes to use tariffs for what he calls “leverage,” although you might consider that a euphemism for arm-twisting. Whatever you want to call it, it seems to work, and why wouldn’t it? If someone pointed a gun at you and said, “Gimme all your money,” you’d probably give it to him.

China, Canada, Mexico, the European Union and other targets of Trump’s tariff war don’t want to tangle with him or with the richest country on earth (for now). So, each of them has tossed him some bones to keep him from biting them.

These are trade policy effects that Trump is no doubt proud of.

But the following are not.

A recent study by economists from the New York Federal Reserve Bank and Columbia and Princeton Universities, entitled “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” found that the principal victims of Trump’s tariff war were American consumers.

“[We] find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018,” it said.

This is an unintended, but certainly not an unanticipated, effect. Trade sanctions always victimize consumers.

And farmers.

When other countries react to what they consider unfair trade practices by the United States, they almost always hit back where it hurts – in farm country. Since China imposed a retaliatory tariff of 25% on American soybeans, farmers who had been exporting most of their beans to China are now storing them in grain bins, where they’re in danger of spoiling. China has made up for the loss by buying more soybeans from Brazil.

U.S. energy companies can’t ship liquified natural gas to China, because China has imposed a 10% retaliatory tariff on U.S. LNG. The world’s second-largest LNG importer, after Japan, China has turned to other suppliers, such as Australia and Qatar.

Some Chinese companies have gotten around Trump’s tariffs on $250 billion in Chinese exports by opening factories in other countries and shipping to the U.S. therefrom. For example, the Washington Post reported on March 27 that Fuling Global Inc., a Chinese company that makes paper cups and straws for the U.S. market, opened a factory in Monterrey, Mexico and will ship its products to the U.S. from there, duty-free under NAFTA.

U.S. importing companies have to post a customs bond to assure the Customs and Border Protection agency that they will pay the tariff on the goods they import. As a consequence of Trump’s tariff war, the cost of a customs bond has increased exponentially, 500-fold in some cases, Reuters reported on March 29. This poses a particular hardship on small companies. Those that don’t pay the full amount receive insufficiency notices. CBP issued about 3,600 of those in the first quarter of 2019, a spokeswoman said. She declined to say how that compared with previous years. The Roanoke Insurance Group of Schaumberg, Ill. provided data showing that CBP issued an average of 2,070 per year between 2006 and 2017.

This problem is bound to get worse this month, as Mexico is expected to publish a list of retaliatory tariffs to supplement those it imposed in June 2018 after the Trump administration imposed tariffs on steel and aluminum imports of 25% and 10% respectively. The Mexican government reasonably expected those tariffs to go away after it agreed to the NAFTA renegotiation that the U.S. forced on it. But they didn’t.

The steel tariffs have been great for the U.S. steel industry, but not for anyone else. U.S. Steel (NYSE:X) CEO David Burritt said in a March 25 letterto the Wall Street Journal that the tariffs had allowed his company to restart plants and create more than 1,000 jobs.

Industries that use steel – autos, construction, home appliances and many others – aren’t so thrilled about the tariffs. The Ford Motor Company (NYSE:F) reported in January that the tariffs had cost it $1.1 billion more in 2018 than 2017.

Life will get a lot worse for the auto industry if Trump imposes a 25% tariff on imports of autos and auto parts, as he is considering doing. That would increase the average price of a car – foreign or domestic – sold in the U.S. by as much as $2,750 and “threaten” more than 366,000 jobs, according to a study by the Center for Automotive Research.

Caterpillar (NYSE:CAT) said the steel tariffs had cost it more than $100 million in 2018 and that it expected to pay twice that much this year. Caterpillar said it planned to raise prices on most of its products by as much as 4%.

The U.S. and Chinese governments have been saying lately that they’re close to a deal to end the trade war. If Trump follows through on his threat to put a 25% tariff on auto imports, he’ll find himself in another, with the EU, the world’s largest market, all because the EU has a 10% car tariff.

John Brinkey was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.

House Democrats Won’t Accept USMCA In Its Present Form

Looks like it’s back to the drawing board for NAFTA aka USMCA.

House Democrats, who will be in charge of the new Congress that convenes in January, have made it clear that they won’t accept the NAFTA revision that President Trump forced on Canada and Mexico in its present form. Among other things, they want stronger, more enforceable labor standards.

NAFTA labor standards are addressed in a side agreement and aren’t fully enforceable. In the revised NAFTA, which Trump renamed the U.S. Mexico Canada Agreement, labor standards, including new ones, are in the body of the agreement and are fully enforceable. But there’s a big difference between “enforceable” and “enforced.”

For example, the new deal requires that 40-45% of a car built in North America be built by workers earning at least $16 per hour. This is aimed at Mexico, because American and Canadian auto workers already earn more than that.

It’s hard to imagine how anyone could enforce a rule like that.

Also, U.S autoworkers earned between $19.31 and $29.73 per hour in September, according to the U.S. in Mexico and paying the 2.5% tariff to import them into the United States.

USMCA’s labor chapter also requires Mexico to enact laws or regulations mandating the “effective recognition of the right to collective bargaining,” and “the elimination of discrimination in respect of employment and occupation.”

However, a June 2018 report on employment discrimination against Mexican women, prepared for the Office of the UN High Commissioner for Human Rights, said, “Although employment discrimination can be legally punished through many different means in Mexico, according to available data, it is rarely actually punished. . . between 2013 and 2017, not one single employer in all the country was fined for employment discrimination or harassment.”

This is one of many problems with employment discrimination against women the report described.

The United States or Canada could file complaints against Mexico for employment discrimination under one of USMCA’s dispute resolution chapters. But the process for doing so would be long and complicated and winning would affect little if any change on the ground in Mexico.

Sex discrimination is rampant there, although it’s not as bad as it used to be. As recently as the mid-1990s, Mexican businesses placed want ads in newspapers specifying that applicants must be young, female and attractive. Women who didn’t fit that description had a hard time finding work. This led many of them to immigrate to the United States.

If the Trump administration put stronger labor standards in USMCA to get Democrats to support it, it didn’t work.

“Right now, it’s a work in progress,” said Rep. Nancy Pelosi, D-Calif., who will probably be the speaker of the House in the next Congress. “Without enforcement you don’t have anything.”

Rep. Richard Neal, D-Mass., who probably will be chairman of the House Ways and Means Committee, said in a statement, “ we will need to assess whether this agreement makes real improvements to the terms of the existing NAFTA . . . especially when it comes to the enforcement and enforceability of the agreement’s provisions, including the provisions that have always been critical to Democratic support – the ones that provide for worker rights and environmental protections.”

Trump has two choices.

If he wants to put USMCA into effect, he’s going to have to do the hard work of making it acceptable to House Democrats. That will mean, among other things, making sure the labor rights provisions aren’t just enforceable, but enforced. That, in turn, will mean more negotiations with Canada and Mexico, neither of which will be keen on going at it again with the Trump administration.

Or, he can walk away from the deal, leaving NAFTA in place. In that event, he might make good on his threats to withdraw from NAFTA, leaving the United States even more isolated than it already is. Commerce Secretary Wilbur Ross suggested that Trump would do that if Congress doesn’t ratify USMCA.

“The president can revoke the old NAFTA deal by simply giving six months’ notice,” he said in an October 1 interview with Fox Business News. “The old NAFTA deal is not going to be a realistic alternative.”

And, of course, Trump views NAFTA as “perhaps the worst trade deal ever made.” So, why wouldn’t he withdraw from it if he doesn’t get USMCA?

Taking the United States back to 1989, when it had no trade agreement with either Canada or Mexico, is not a realistic alternative, either.

I was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.