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International Trade: The News is Better Than the Headlines

International Trade: The News is Better Than the Headlines

Buried in the recent avalanche of trade tweets were two interesting data points that did not make the front page. The first is a speech by World Trade Organization (WTO) director general Roberto Azevedo that rolled out the WTO’s annual trade forecast. He noted that global trade grew 4.7 percent last year, which was the largest increase in six years, and that it is predicted to grow at the rate of 4.4 percent this year and four percent next year.

This data was accompanied by the now-standard caveat that an increase in protectionist actions and particularly a “cycle of retaliation” (no names mentioned, but we all know who he was talking about) could negatively affect these numbers. The report also noted that these numbers are below the average annual growth rate since 1990, which is 4.8 percent.

So, the news is not spectacular, but it also is not panic inducing. There has been an increase in the number of articles recently about the end of globalization, declining world trade, and what that means for everybody (something bad, for sure). The actual data suggests, however, that panic may be premature. World trade is not declining—yet—it is growing, and growing at a still-respectable rate. The question the United States faces is to what extent we will continue to be a part of it.

When I teach globalization, we have a discussion about whether it is reversible. The outcome is usually agreement that the answer is “yes,” but it takes a fairly cataclysmic series of events for that to happen. There are three historical examples, two of them very old: the collapse of the Roman Empire in the fifth century and the recurring arrival of plague in Europe in the thirteenth and fourteenth centuries. The more recent example is the period after 1913, when global trade began a steep decline that was not entirely erased until around 1970. Two world wars and the Great Depression had a lot to do with that.

We can never rule out a new cataclysm. Neil Howe and William Strauss, in their 1997 book, The Fourth Turning: An American Prophecy, see history as a series of roughly 20-year cycles that begin with strong institutions and high social confidence and culminate in a “third turning,” which is a time of weak and distrusted institutions, strong individualism, rampant cynicism, and weak civic authority. (Sound familiar?) The fourth turning that follows, appropriately called “Crisis,” is when we rebuild from the ground up. That may well be our fate, but as far as the global economy is concerned right now, we are clearly not there yet. The sand may be leaking out of the bag, but so far it’s just a dribble, which means there is still time for repairs.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, DC. This article originally appeared here.

Trump has imposed tariffs on steel and aluminum shipments of export cargo and import cargo in international trade.

The President’s Steel Tariff

The president’s decision to impose a 25 percent tariff on steel has produced the predicted criticism from downstream steel users worried about price and availability of products they have been importing and from foreign governments standing up for their producers and threatening retaliation. Those of us who have worked on steel over the years, and I have on and off for 40 years, have seen this movie before. It is not the industry’s first import crisis, and it is not likely to be its last.

The US steel industry has often succeeded in obtaining import relief because it has been able to establish two fundamental facts. First, it is an important industry, one which is essential to a modern manufacturing economy. Its disappearance would put us at a competitive disadvantage. (The fact that it is also politically important in some key Rust Belt states should also be noted.) Second, it has unquestionably been the victim of unfair trade practices for many years and, as a result, has accrued a certain amount of sympathy and a view by many that fairness and justice demand some redress.

That is not enough to make the critics go away, but it does help explain why the industry has had some success with its arguments. Of course, the fact that, despite periodic bouts of relief, the industry’s overall situation continues to deteriorate tells us that there is more going on here than simply unfair trade practices. And, indeed, the current episode is a bit different from previous ones in that the blame for global overcapacity lies almost entirely with a single country, China, which now accounts for just about half of global capacity.

The ideal solution in a case like this would be a global agreement on overcapacity in which all producers agree to cuts, some much bigger than others. There is a venue for negotiating that—the Organization for Economic Cooperation and Development (OECD) Global Forum on Steel Excess Capacity—but progress has been slow, and the United States has not put the energy into it that would be necessary to move something along.

Instead, the president has resorted to a tariff, which will probably have the bad effects the critics are alleging, while at the same time providing protection to the domestic industry. Whether the harm he has done will outweigh the benefits to the industry remains to be seen. We may get a hint in our upcoming election cycle as candidates support or oppose his action, and the voters respond.

The more interesting question concerns foreign retaliation. While it will no doubt occur—plans are being hatched as you are reading this—the countries contemplating it should consider carefully what is most in their interests. The obvious reaction is to hit back at the United States through restrictions on our exports that will cause the greatest political pain here at home. The European Union in particular has a good bit of experience developing painful retaliation plans, so nobody should be surprised if one appears soon.

The less obvious but more useful approach is for other countries to realize that a China-caused overcapacity problem is their problem as much as it is ours—that it is Chinese steel flooding their markets and undercutting their prices—and that a smarter move would be to take action against China similar to what the United States has done. Otherwise, they suffer a triple whammy: US tariffs on their steel, higher prices on US imports into their countries due to their retaliation, and more Chinese steel coming their way rather than ours. Focusing their ire on China would eliminate two of those three problems, and it would have the added benefit of pushing the Chinese to deal directly with the problem it has caused everybody else.

This is admittedly Plan B. A global agreement is the best option, and this one is not a pro-trade solution. It would be no more protected from World Trade Organization (WTO) litigation than our own action will be, but in the absence of a negotiated agreement, it is one way to turn lemons at least partly into lemonade, which we sorely need right now.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, DC. This article originally appeared here.

Trade agreement promote more shipments of export cargo and import cargo in international trade.

What Is Trump Thinking On Trade?

Although the president withdrew from the Trans-Pacific Partnership before the deal could go into effect, he did not take action on his other trade threats, and there were many issued. They included imposing tariffs on Germany, China, or Mexico, and pulling out of the US-Korea Free Trade Agreement, the North America Free Trade Agreement (NAFTA), or even the World Trade Organization.

There is widespread speculation he will launch some form of retaliation this year against US trading partners – perhaps as soon as an announcement in his State of the Union speech this month. Opinion divided as to which country will be his focus. China is a good bet.

2018: What’s Trending

It would be a guessing game to try to predict what the president might do specifically on trade in 2018. Whatever he decides, there are trends morphing the trading system even as the US Government works to figure out its role in shaping it.

Charm offensive with China losing its luster. More governments are becoming alert to the challenge China poses to their economies as well as to rule of law and the trading system generally. This is not new for the United States, and the president’s national security strategy focuses squarely on it. The new development is that others are beginning to see things the same way, particularly in Europe, which has historically lagged in its concern about China.

Multinational businesses are gradually falling out of love with the Chinese market, recognizing the long-term challenge to their competitive survival that China represents. Many are still reluctant to sacrifice their short-term profits, so their support for stronger trade measures toward China is quiet, but it is still support. This will not play out easily, as the Chinese are masterful users of both soft power and retaliation, but the battle is now joined, and China knows it.

Retro trade laws are back. The Trump administration is ramping up its use of 1980s US trade laws, particularly our antidumping and countervailing duty laws. These laws have their limitations – they are narrowly focused, time consuming and expensive for companies to pursue – but they have the advantage of being WTO consistent.

The Trump administration will use these laws to try to counteract the massive subsidies the Chinese government is planning to support its high-tech sectors identified in its “Made in China 2025” report. We expect to see more of antidumping and subsidies cases brought by companies and initiated by the administration in 2018.

A recalibration of global engagement. The World Trade Organization (WTO) has been criticized for its inability to complete the Doha Round (it’s member driven, so by definition, the members failed to produce agreement) and hasn’t made swift progress advancing smaller deals aside from the Trade Facilitation Agreement, which will take time to produce its full benefits.

Amidst the mounting skepticism, this administration is raising new doubts about the WTO’s procedures, particularly with respect to how the WTO settles trade disputes. Treasury Under Secretary for International Affairs David Malpass expressed the administration’s view succinctly in a November 30 speech to the Council on Foreign Relations in New York: “Our view is that multilateralism has gone substantially too far, to the point where it is hurting US and global growth.”

Without a countervailing pull by the United States toward rule of law in the international marketplace, countries such as India and China could move even more aggressively into the multilateral space to use it for their own ends.

The global battle to attract investment intensifies. Countries are in a competition for investment dollars and the jobs that come with business investments. Even as they work to attract more investment, a growing concern is the rise of Investment restrictions, particularly in the United States.

On the inbound side, legislation was introduced to update the Committee on Foreign Investment in the United States (CFIUS) to address national security concerns. The legislation has been criticized by some as not going far enough (primarily because it does not include a “net economic benefit” test in addition to a national security test) and criticized for going too far in ways that will discourage new investment.

In addition to the possibility of more restrictions on inbound investment, the administration has consistently expressed a preference for keeping American investment at home and is exploring ways to curb outbound American investments.

Defining Moment

All of these trends indicate a more defensive posture by the administration is based on the idea that the world is taking advantage of us. However, the United States largely designed the current global trading system and has benefited enormously from it, and the United States is the most competitive nation in the world. So, the choice to shape the system with a confident posture, or fight in a defensive posture, is ours. 2018 will demonstrate which this administration chooses.

William Reinsch holds the Scholl Chair for International Business at the Center for Strategic and International Studies. He previously served as president of the National Foreign Trade Council and as the Under Secretary for Export Administration in the US Department of Commerce. 

This article originally appeared on Used with permission.

Trump placed safeguard measures on shipments of export cargo and import cargo in international trade.

Import Relief: It’s Complicated

The two Section 201 cases that the president recently decided—solar panels and washing machines—are good illustrations of how much the trade landscape has changed in recent years and how unexpectedly complicated these decisions have become.

Section 201 of the Trade Act of 1974 authorizes “safeguard” measures, which are permitted under limited circumstances by the World Trade Organization (WTO). To get “relief,” a petitioning company or industry need not prove dumping or subsidization or any other unfair practice. It simply needs to establish that a fairly rapid increase in imports is causing serious injury. The safeguard concept permits temporary import relief in such cases, usually defined as no more than four years, with the expectation that any relief granted will decline in each succeeding year. To win, the International Trade Commission (ITC) must decide that serious injury has occurred by reason of the imports and recommend a remedy, but final action is up to the president, who has broad discretion.

Old Trade Laws, New Economy

This has not been a common remedy in recent years—the last one before these two was in 2001. It fell into disuse partly because it proved difficult to get presidents to approve relief even after an industry had “won” at the ITC, and the 2001 case involving steel, which the United States subsequently lost at the WTO, was a signal that even winning was no guarantee of significant relief.

The two current cases, however, illustrate how much the trading system has changed in the past 30 years. Early 201 cases involved items like footwear, where rapid increases in imports were wiping out a domestic industry. The consumer decision was binary—you bought American shoes or foreign—and the consequences showed up in job losses here and job gains overseas. The case was clear-cut, although the president did not always provide relief.

Workers Lose, Workers Gain

Things got more complicated in an automobile case in the 1980s. The industry failed to convince the ITC that the cause of its injury was imports as opposed to other factors, but the case, along with subsequent congressional attempts to legislate persuaded the Japanese to invest in the United States and move car production over here, thereby permanently changing the nature and composition of the domestic industry. Echoes of that strategy can be seen in the current washing machine case, where the defending Korean companies have pointed out the substantial number of jobs they plan to create in the United States, in the Samsung case via a new plant in South Carolina that has been touted by President Trump as a policy success.

The solar panel case raises another issue. The complaint was brought by US manufacturers of panels, but it has been strongly opposed by the companies that install panels, which account for many more jobs than are involved in panel manufacture. Relief is also opposed by environmental groups arguing that it will lead to higher prices for solar panels and thus declining demand, fewer installations, and greater reliance on fossil fuels.

Who Gets Prioritized — Consumers, Workers, One Set of Employers?

These are not binary choices as they may have been decades ago. Then the argument against relief was primarily the consumer price argument—relief would make shoes more expensive. The president had to weigh prices versus one set of workers. In both new cases, there is opposition to relief from companies that account for (or say they will account for) a significant number of jobs, so the president has to weigh some jobs against other jobs, with, in the solar panel case, the likelihood that relief will lead to many more jobs lost than gained.

In a globalized marketplace where everything is made everywhere via global value chains, answers are not clear-cut. Import relief will save or create some jobs, but it will cost others. The cases also illustrate why they end up on the president’s desk. The ITC is charged with two things: determining whether imports are a cause of serious injury, and, if so, proposing a remedy. Making the political of whether saving those jobs outweighs other impacts on the economy, including other jobs that will be lost, falls to the president.

William Reinsch holds the Scholl Chair for International Business at the Center for Strategic and International Studies. He previously served as president of the National Foreign Trade Council and as the Under Secretary for Export Administration in the US Department of Commerce.

This article originally appeared on Used with permission.