New Articles

Amid US-China Trade Battle, Here is how America can Remain the World’s Strongest Economy

China

Amid US-China Trade Battle, Here is how America can Remain the World’s Strongest Economy

The Communist Party of China has laid plans for a century of unlimited Chinese power and, with it, the end of the American era. However, we still can — and must — bet big on the future of American economic power. The best antidote to China’s ambitions is to ensure America’s continued economic and technological preeminence.

Far too many strategists, investors, and policymakers accept China’s economic preeminence as an inevitable outcome, given the country’s enormous population and potential for growth.

As the business community looks toward a “partial trade deal” to unwind tariffs and reduce trade hostility between the world’s two largest economies, we must understand that non-negotiable problems in U.S.-China relations will accelerate if China closes the gap with the United States in terms of economic and technological power. With the right strategic mindset and a focus on domestic productivity, America can not only win the economic and technological contest but also turn the tide in the U.S.-China competition for global power.

China’s bid for global power is built on its economic ascendency, which is based on engagement with the United States and our allies. Chinese companies are capturing global markets and climbing the ranks of the Fortune Global 500 by taking advantage of stolen or coerced foreign intellectual property and state-orchestrated market distortions. The Communist Party is converting China’s technological power into a dystopian surveillance state and a military that is focusing its capabilities on the United States and our partners.

Chairman Xi Jinping calls regularly for Chinese forces to “prepare to fight and win wars,” while converting civilian industrial technology into military power through “civil-military fusion.” Meanwhile, China’s current account surplus is employed for global influence, buying “strategic partners” with intercontinental projects like the “Belt and Road Initiative” and state-backed acquisitions of foreign firms.

U.S.-China competition is likely to be the hardest geopolitical contest in generations — but it is a contest that the United States can win if we focus on the right objectives.

The People’s Republic of China is a challenge to America’s values and concept of world order. U.S.-China competition is likely to be the hardest geopolitical contest in generations — but it is a contest that the United States can win if we focus on the right objectives. So, where do we go from here?

Focus on GDP

The first step must be a focus on accelerating U.S. productivity growth. U.S. productivity growth need only increase from 1.3 percent a year to 2.5 percent for U.S. GDP to remain ahead of China’s for the entirety of the 2020s, the decade in which many expect China’s economy to surpass America’s.

By 2030, economic leadership will be easier to maintain as China’s demographic problems set in. Such a productivity increase is realistic, given that productivity growth from 1995 to 2008 was higher than 2.5 percent.

Protect America’s edge

The second step is to preserve our edge in advanced and emerging technologies. America must remain ahead of Communist China, not only in hard sciences, but also in the actual production of advanced goods and services.

If America competes against China only through soybean and oil production, we will fail to counter China in advanced industries such as robotics, semiconductors, aerospace and biopharmaceuticals. China is gaining in these and other technologies and industries and could eventually have a decisive advantage over the United States.

As Alexander Hamilton warned 200 years ago, America can’t be great if it is a “hewer of wood and drawer of water.” We must out-invent and outproduce China in advanced technology and industrial goods.

Maintaining U.S. advantage will require collaboration between government and corporations towards national goals in science, engineering and industry. This approach has long served our nation in times of international struggle and led to lasting commercial and national security breakthroughs.

New and Big

In order to attain these goals, Washington must think new and big. New in the sense of a bipartisan consensus that productivity growth and technological competitiveness must be national priorities.

Big in the sense of big and bold proposals. Here are three: First, implement a robust research, development and investment tax credit that will stimulate innovation and investment on American soil. Second, establish a series of well-funded “moonshot” goals to ensure American leadership in emerging industries such as advanced robotics and quantum computing. Third, develop a national productivity strategy that will take the best ideas of government and industry and focus on building the next $10 trillion in annual U.S. GDP by 2030.

Half a century ago, under the leadership of President John F. Kennedy, America faced a Communist superpower that believed that it would “bury” the United States, much as Chinese Communist leaders today believe that the 21st century belongs to China. Kennedy reminded us then that America would “bear any burden” and “meet any hardship” to prevail in that consequential time.

In the end, it was the power of the American economy, the power of American technology, and the power of American industry that brought victory over our ambitious foe. We must unleash these forces once again, wrestle them into national service, and build on toward the greater good — an American era that can and must prevail.

__________________________________________________________________

Dr. Jonathan D.T. Ward is the author of “China’s Vision of Victory” and founder of Atlas Organization, a strategy consultancy on US-China global competition. Follow him on Twitter @jonathandtward

Dr. Robert D. Atkinson is the president of the Information Technology and Innovation Foundation and the author of “Big is Beautiful: Debunking the Mythology of Small Business.” Follow him on Twitter @robatkinsonITIF..

This article originally appeared on FoxBusiness.com. Republished with permission. 

phase one

The Phase One Deal: How We Got Here And What Is Next

President Trump announced that the United States and China had reached a partial “Phase One” trade deal in mid-October, signaling a pause in the trade tensions that have steadily grown over the past two and half years.  While the precise goals of the President’s trade action against China have always been vague, there was an unquestionable desire to change certain structural issues of the Chinese economy, particularly with the country’s intellectual property and forced technology practices.  

To put the proposed Phase One deal in its proper context, this article breaks down (1) the various stages of escalation since President Trump took office, (2) what’s known about the contents of agreement, and (3) the potential risks that could derail the deal from being signed.  

The Escalation of the Trade War

The President’s most high-profile actions against China have been his use of long-thought-defunct trade authority, Section 301 of the Trade Act of 1974 (“Section 301”).  Section 301 grants the President the authority to impose tariffs on countries if it determines that the acts, policies, or practices of a country are unjustifiable and burden or restrict U.S. commerce.  

Following a lengthy investigation, the Office of the U.S. Trade Representative (“USTR”) officially determined in March 2018 that China’s policies result in harm to the U.S. economy.  Simultaneously, President Trump signed a Presidential Memorandum outlining a series of remedies that his Administration would take in response to these findings, most notably the imposition of tariffs.  

President Trump’s Section 301 tariffs currently cover most products imported from China, after having been rolled out in four different lists:  

-List 1 of the Section 301 tariffs went into effect July 2018 and imposes a 25 percent tariff on $34 billion worth of goods from China.  

-List 2 went into effect August 2018 and imposes a 25 percent tariff on $16 billion worth of goods.  

-Following China’s retaliatory tariffs on Lists 1 and 2, the United States announced List 3, which began imposing a 10 percent tariff on $200 billion of Chinese products in September 2018.  The List 3 tariffs were increased to 25 percent after negotiations between the two countries fell apart.

-List 4 could hit almost $300 billion more of Chinese products.  Part of the list (“List 4a”) went into effect on September 1 and imposes 15 percent tariffs on $112 billion of Chinese products.  The U.S. is scheduled to impose 15 percent tariffs on the remaining $160 billion of the list (“List 4b”) starting December 15.  

The Trump Administration has taken aggressive action to increase pressure on China that goes well beyond the Section 301 tariffs.  Since President Trump took office, he has targeted China’s steel and aluminum industries through global tariffs on these products. He has (at least temporarily) sanctioned major Chinese tech firms or restricted their ability to do business with the United States.  He has sanctioned Chinese individuals and entities connected to North Korea and others related to the treatment of the Uighurs in western China. He signed into law a major expansion of authority for the Committee on Foreign Investment in the United States (“CFIUS”), which has immediate and future implications for Chinese investment in the United States. 

Additionally, the Administration has moved closer to Taiwan. President Trump has authorized significant military sales to Taiwan, and as President-elect, he took a call from Taiwan’s leader Tsai Ing-wen, the first such call by a U.S. President or President-elect since the 1970s. The Administration has either directly or indirectly made clear that these restrictions, sanctions, and geopolitical relationships can be used as points of leverage in the trade negotiations.  

The Phase One Deal

Many details about what is included in the Phase One deal remain unknown.  In announcing the deal, President Trump said “We have a great deal. We’re papering it now.  Over the next three or four or five weeks, hopefully, it’ll get finished. A tremendous benefit to our farmers, technology, and many other things — the banking industry, financial services.”  As the two sides “paper” the agreement into finalized text, what is known about the deal has come largely from statements made by both sides. We know that as part of the deal, the United States will not pursue plans to increase the List 1-3 tariffs from 25 percent to 30 percent. We also know China plans to make large purchases of U.S. agricultural products.  

There are reports the Phase One deal could also delay or cancel the planned List 4b tariffs. Other reports suggest that China is seeking additional eliminations or reductions of the Section 301 tariffs.  

As for the structural changes to the Chinese economy sought by the Trump Administration, it seems as though they could be mentioned in the Phase One deal, but the real work will be addressed in subsequent phases.  

What Comes Next

The stars were aligning for President Trump and President Xi to sign the Phase One deal at the Asia-Pacific Economic Cooperation (“APEC”) meetings in Santiago, Chile this week.  Unfortunately, the APEC meetings were unexpectedly cancelled due to protests in the country, highlighting that a few weeks can feel like an eternity for sensitive trade talks.  

Assuming the U.S. and China can find another location, there are still risks out there that could prevent the deal’s signing.  

One big risk to the deal is the events unfolding in Hong Kong. The Trump Administration has been notably quiet on the protests, outside of President Trump expressing his faith in President Xi to satisfactorily resolve the situation.  The strongest statement from the Administration came from Vice President Pence, who recently said, “[T]he United States will continue to urge China to show restraint, to honor its commitments, and respect the people of Hong Kong.  And to the millions in Hong Kong who have been peacefully demonstrating to protect your rights these past months, we stand with you.”

According to multiple reports, President Trump pledged to Chinese President Xi Jinping that his Administration would remain quiet on the Hong Kong protests throughout the trade talks.  However, the Administration’s hand could be forced if the protests escalate into more sustained violence or if, as is expected, Congress passes legislation in support of Hong Kong with veto-proof majorities.  

Another risk is more vocal opposition from so-called “China hawks” that are dissatisfied that Phase One doesn’t get to the heart of the problems they have with China’s economic practices.  Senate Minority Leader Chuck Schumer (D-NY) cautioned the President that he “shouldn’t be giving in to China unless we get something big in return.” Senator Marco Rubio (R-FL) doubted China’s commitment to the deal long-term, saying, “I do believe that [China] will agree to things they don’t intend to comply with.” There are reports that China hawks within the White House are also pushing the President to reject the deal, notably Director of the Office of Trade and Manufacturing Policy Peter Navarro.  

A deal to end or pause the trade tensions between the United States and China would provide the private sector with more certainty as they make decisions about 2020 and beyond.  The Phase One deal looks to provide at least a pause, but geopolitical actions or domestic opposition could still derail the agreement before it is signed.   

___________________________________________________________

Rory Murphy is an Associate at Squire Patton Boggs, where his practice focuses on providing US public policy guidance, global cultural and business diplomacy advice that helps US and foreign governments and entities with doing business around the globe.

quotas

Are Quotas Worse Than Tariffs?

Quotas Return

With all the focus on tariffs these days, it is easy to overlook the return of another tool used to limit imports: quotas.

Over a year ago, the Trump Administration used Section 232 of the Trade Expansion Act of 1962 to impose 25 percent tariffs on specified steel imports and 10 percent tariffs on specified aluminum imports. Three countries – South Korea, Brazil and Argentina – made agreements with the United States to apply quotas to their steel exports in lieu of the Section 232 tariffs. Argentina also agreed to quotas on its aluminum exports.

According to numerous reports, U.S. negotiators were seeking similar agreements with Canada, Mexico, Japan and the European Union (EU). In May 2019, however, the governments of the United States, Canada and Mexico announced that they had reached a deal to lift steel and aluminum tariffs without imposing quotas, choosing instead to adopt a monitoring system with the right to re-impose tariffs on these products if surges are detected in the future. This deal could be a template for agreements with Japan and the EU to address their steel and aluminum tariffs.

In ongoing Section 232 investigations, the administration is keeping quotas on the table in other sectors including autos and auto parts, uranium ore and titanium sponges.

The Difference between Quotas and Tariffs

Quotas and tariffs are both used to protect domestic industries by artificially raising prices in the domestic market. Their administration and effects, however, differ in specific ways. Quotas restrict the quantity of a good imported from another country. Tariffs are a charge levied on the value of goods imported from another country.

While tariffs generate revenue that is paid to the importing country’s treasury, the value of a quota, also called “quota rents,” generally goes to the foreign exporters who are able to sell goods subject to the quota at higher prices and collect higher per unit revenue. In both cases, domestic consumers in the importing country pay the costs of tariffs and quota rents. But with quotas, the government of the importing country receives no revenue.

Quotas can be much more complicated to administer than tariffs. Tariffs are collected by a customs authority as goods enter a country. With quotas, customs authorities must either monitor imports directly to ensure that no goods above the quota amount are imported, or can award licenses to specific companies, giving them the right to import the amount allowed under the quota. Quotas can also take the form of a voluntary export restraint (VER), where the exporting country administers the quota.

The Cost of Quotas

Costs and pricing under a tariff regime are more transparent and predictable compared to quotas. For example, if a good is subject to a 10 percent tariff, then the good should cost about 10 percent more than it did before the tariff was imposed. With a quota, the price of that same good can increase as long as demand for the good continues and the supply remains constrained. This can mean that quota rents are ultimately more costly to domestic consumers than a tariff. In this way, quota regimes may incentivize foreign producers to upgrade the quality of their exports, leading to more direct competition with domestic producers and a higher-price product mix for consumers.

On the other hand, if foreign producers export low-quality goods under a quota regime, prices and profits for both foreign and domestic producers of low-quality goods will rise because of quotas, while domestic consumers were forced to pay more for lower quality goods.

The General Agreement on Tariffs and Trade (GATT) prohibits quotas and other quantitative restrictions under Article XI (with specific exceptions including for “security reasons”) as the GATT parties agreed that quantitative restrictions were overly restrictive and distortive compared to duties or taxes, where are permitted.

Tricky to Administer

In the case of South Korea, Brazil, and Argentina and Section 232 quotas, each country agreed to product-specific absolute quotas on 54 separate steel articles based on each country’s average annual import volumes of steel from 2015 through 2017. Argentina also accepted product specific absolute quotas on two aluminum product categories.

Steel quotas under Section 232- South Korea, Brazil and Argentina

These quotas are administered by the United States to give exporters the least possible flexibility and demonstrate how complicated quota regimes can be. Some of the quotas are absolute – once the quota is reached, no additional amount can enter the United States for any price, unless an exclusion is granted. Some quotas apply to the full calendar year (but in practice may fill the minute the quota takes effect), and others are subject to quarterly limitations. Once a quota is filled in a given quarter, importers must wait until the next quarter until they can bring the product into the United States.

The True Cost in Practice

For South Korea, Brazil, and Argentina, quotas have reduced export volumes and revenue. According to U.S. Department of Commerce data, the overall quantity of steel South Korea, Brazil, and Argentina exported to the United States in 2018 dropped significantly compared to 2017, by 26.2 percent, 14.6 percent, and 20.1 percent, respectively.

In terms of value, South Korea and Argentina’s steel exports subject to quotas dropped by $430 million and $1 million, respectively, from 2017 to 2018, while the value of Brazil’s steel exports under the quota increased by nearly $145 million in 2018. Argentina’s aluminum exports subject to the quota dropped by approximately 86.8 million kilograms from 2017 to 2018, by 32.8 percent, with a decrease in value of approximately $101 million, according to data from the U.S. International Trade Commission.

Although South Korea, Brazil, and Argentina have benefitted from generally higher prices in the United States for steel and aluminum, so far, the quotas are effectively reducing U.S. imports from these countries.

US imports of steel mill products- South Korea, Brazil and Argentina

Upsides for U.S. Steel Producers

For U.S. steel and primary aluminum producers, Section 232 tariffs, and to a limited extent, quotas, are accomplishing their goal of bolstering U.S. manufacturing capacity and allowing their firms to become profitable again — at least in the short run.

Though some proponents of the Section 232 protections do not advocate for quotas specifically, and recognize their downsides, others argue that quotas are a necessary component of the Section 232 program. Here’s why.

First, for industries seeking protection, quotas arguably provide greater certainty than tariffs that imports will be limited. Under tariffs, if importers can bear the costs, or exporters can reduce their prices, imports will continue to flow in and competition will remain high. For example, Vietnam’s 2018 exports of flat steel products, which are covered by Section 232 tariffs, increased by 79 percent compared to 2017. If strict quotas were applied instead of tariffs, Vietnam’s 2018 exports likely would have decreased.

Second, steel and aluminum manufacturers argue that without quotas, “countries that have exemptions [to the Section 232 tariffs] would likely redirect their metals exports to the United States to take advantage of higher prices there, undermining the purpose of the tariffs.”

Finally, the Trump Administration perceives that Section 232 quota agreements with U.S. trading partners and security allies, in combination with tariffs, are helping to pressure and incentivize allies to take seriously the problem of global excess capacity. U.S. unilateral tariffs may also have the opposite effect, though, – making allies less willing to work cooperatively with the United States to address fundamental global problems.

Downsides for Downstream Industries

It’s a different story for U.S. downstream manufacturers, who say quotas have entailed “severe supply constraints” and “created even more business uncertainty than tariffs”.

Importers may no longer be able to guarantee that their goods can enter under the quota, or at all. They may encounter unanticipated costs in the form of storage charges and shipping fees if the quota is filled while goods are in transit. They may face unpredictably higher prices for goods subject to a quota. They may have to find new suppliers and bear all the costs of negotiating new contracts, building new relationships, and shipping from a new location. The exclusion process implemented in August 2018 may provide some relief for importers under supply pressure, though its application may also introduce more uncertainty.

More generally, downstream manufacturers argue that Section 232 quotas and tariffs raise prices inhibiting their competitiveness, and have a chilling effect on growth, employment and investment. Although many businesses have been buoyed by the strong U.S. economy, they say that employment and sales in their industries would have increased even more were it not for tariffs and quotas raising prices. Moreover, downstream industries using steel and aluminum products employ more Americans than steel and primary aluminum manufacturers, so many jobs are vulnerable if supply contracts too much.

North America Alternative to Metal Quotas

In order to move forward with passage of the United States-Mexico-Canada Agreement (USMCA), the United States, Canada and Mexico first had to address the steel, aluminum and retaliatory tariffs in place since 2018. Although all parties considered quotas as a possible way forward, in the end, they agreed to lift all steel, aluminum, and related retaliatory tariffs, as well as withdraw pending WTO litigation, without imposing quotas.

The three countries agreed to prevent the importation of aluminum and steel that is unfairly subsidized and/or sold at dumped prices; prevent the transshipment of aluminum and steel made outside of Canada, Mexico, or the United States to the other country; and establish a monitoring process to detect surges of aluminum and steel imports among them.

This agreement is a positive development for two key reasons: the parties removed tariffs while avoiding quotas, and agreed to address the underlying cause of U.S. industry distress – global excess capacity.

Addressing Global Excess Capacity is Key

Though tariffs and quotas may provide short-term relief, solving underlying global excess capacity problems is critical to addressing U.S. industries’ long-term challenges, and any long-term solution will require more than the mere application of protectionist measures. The United States will have to work closely and creatively with its trading partners to address this challenge directly and to persuade the world’s largest producers — including China — to reduce global excess capacity.

__________________________________________________________

This article is a shortened version of an original report published by the Hinrich Foundation.

Feature Image Credit: Jason Welker, from “Protectionist Quotas” video on Youtube.

Holly Smith

Holly Smith is a lawyer and consultant based in Hong Kong. From 2009 to 2015, she served in the Office of the United States Trade Representative as a Director for Intellectual Property and Innovation, a Director for China Affairs, and a senior policy advisor to the Deputy U.S. Trade Representative.

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

USMCA

Has Move to Impeach President Trump Pushed Aside the USMCA?

The momentum to impeach in Washington, D.C., is not only hurtling Congress and President Donald Trump toward a potential constitutional crisis, but the prospect of reaching a solution to the ongoing trade standoffs has dimmed considerably.

That’s the opinion of leading international trade lawyer Clifford Sosnow, who notes the time frame for passing the U.S.-Mexico-Canada Agreement (USMCA)—and thereby revamping the North America Free Trade Agreement (NAFTA)—is growing shorter by the day, denting plans for global companies that rely heavily on exports.

“With impeachment officially on the table and the hyper-partisan climate in the lead-up to next year’s elections, there is serious concern whether the USMCA is dead in the water,” says Sosnow, an Ottawa-based partner with Canadian law firm Fasken.

“It’s unclear how much of a window is even left for approval of the USMCA. There are also high odds of failure post-election, especially if the Democrats win. The party has not shown any enthusiasm for the USMCA in its current form.”

Sosnow is not shooting from the hip in an easy chair. He has appeared before NAFTA and WTO panels and the Canadian International Trade Tribunal, and he has numerous clients affected by tariffs as well as any decisions on NAFTA, including automobile manufacturers, banks, service companies, IT companies, large retailers, manufacturers, agriculture business, aerospace firms, and transportation companies.

Russia

U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

The Trump Administration on Aug. 2 imposed a second round of sanctions on Russia in response to Moscow’s 2018 use of chemical weapons in the United Kingdom to poison a former Russian spy. Three days later, the White House intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with China and … wait for it … Russia!

So much for collusion.

For the seed that planted the intensified economic pressure on the Kremlin, you have to go back to March 2018, when former Russian double agent Sergei Skripal (a British national) and his daughter were poisoned with Novichok, a military-grade nerve agent developed in the Soviet Union, at their home in Salisbury, England. 

The UK determined that the Russian government was responsible for the attacks and, in response, the U.S. expelled Russian officials, closed the Russian consulate in Seattle and, in August 2018, announced sanctions that impacted arms sales and foreign assistance to Russia. The second round of sanctions concern restricted export licensing and loans and other financial assistance from U.S. banks and international financial institutions to Russia. 

As was the case with Russia, the Venezuela sanctions came as a result of a late-night Executive Order by President Donald Trump, who blocked all property, and interests in property, of the South American country’s government that are within the jurisdiction of the U.S. The Secretary of the Treasury is also authorized to impose secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Venezuelan government. 

Trump’s order accuses the Maduro regime of “human rights abuses,” “interference with freedom of expression” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

U.S. Strengthens Sanctions Targeting the Government of Venezuela

On August 5, 2019, the Trump Administration intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with Venezuela’s supporters, Russia and China.  In a late-night Executive Order, President Trump announced that all property, and interests in property, of the Government of Venezuela, including its agencies, instrumentalities, and any entity owned or controlled by the foregoing, that are within the jurisdiction of the United States would be blocked.

The Order further suspended entry into the United States of sanctioned persons absent a determination from the Secretary of State. The Order also authorizes the Secretary of the Treasury to impose additional secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Government of Venezuela.

Background

In January 2019, after months of economic turmoil and political unrest under Venezuelan President Nicolás Maduro, the United States formally recognized Juan Guaidó, the leader of the Venezuelan National Assembly, as the country’s legitimate head of state.  More than fifty nations followed suit, asserting that President Maduro’s 2017 reelection was illegitimate and that Guaidó was the rightful interim president under the Venezuelan constitution.

The Trump Administration followed its recognition of Mr. Guaidó as interim president with sweeping sanctions on the Venezuelan government. The measures included designating Venezuela’s state-run oil company, Petróleos de Venezuela, S.A. (“PdVSA”), as a Specially Designated National (“SDN”), thereby prohibiting U.S. persons from engaging in transactions with PdVSA, as well as transactions by non-U.S. persons conducted in U.S. dollars, unless otherwise authorized by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”).  (We previously summarized the PdVSA SDN designation here.)

Despite the increasing U.S. pressure, President Maduro has refused to cede power.  He retains the support of the Venezuelan military, and Russia, China, Iran, Cuba, and Turkey have continued their economic and diplomatic relationships with the regime.

Sanctions Overview

Through this new Executive Order, the Trump Administration has ratcheted up its efforts against the Maduro regime, asserting that further measures are necessary to combat “human rights abuses,” “interference with freedom of expression,” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

However, contrary to initial press reports, the action does not create a comprehensive embargo against Venezuela (on the model of the U.S. sanctions against Iran) that would prevent U.S. persons from engaging in almost all transactions. Instead, the new measures focus on the Venezuelan government by blocking all property and interests in property of the government that are currently in the United States, will be brought into the United States, or come into the possession or control of a U.S. person. There is, however, an exception for humanitarian goods, such as food, clothing, and medicine.  The Order applies regardless of contracts entered into, or licenses or permits granted, prior to the Order.

Further, the Order could have a broad impact outside of the United States by authorizing secondary sanctions against any party determined by OFAC to “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” the Government of Venezuela.  U.S. National Security Advisor John Bolton warned the day after the Order, “We are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution.  There is no need to risk your business interests with the United States for the purposes of profiting from a corrupt and dying regime.”

In conjunction with the Order, OFAC also revised twelve existing general licenses (“GLs”) and issued thirteen new GLs.  Notably, GL 28 authorizes through 12:01 a.m. on September 4, 2019, transactions necessary to wind-down contracts with the Government of Venezuela.  GL 31 also authorizes transactions with the Venezuelan National Assembly and the shadow government of Interim President Juan Guaidó, underscoring that the target of the action is the administration of Nicolás Maduro.

The GLs and related guidance make clear that the people of Venezuela are not the target of the sanctions.  Specifically, OFAC released a document entitled “Guidance Related to the Provision of Humanitarian Assistance and Support to the Venezuelan People,” which emphasized that “humanitarian assistance and activities to promote democracy are not the target of U.S. sanctions and are generally excepted from sanctions . . . ”  OFAC simultaneously issued four new Frequently Asked Questions (FAQs).  FAQ 680 stresses that “U.S. persons are not prohibited from engaging in transactions involving the country or people of Venezuela, provided blocked persons or any conduct prohibited by any other Executive order imposing sanctions measures related to the situation in Venezuela, are not involved.”

OFAC also issued a number of GLs to authorize humanitarian transactions and transactions necessary for communications involving Venezuela, including new GLs 24 (telecommunications and common carriers), 25 (Internet communications), 26(medical services), and 29 (broadly authorizing certain non-governmental organizations).

Further, U.S. persons in Venezuela are not targeted by the sanctions.  Section 6(d) of the Order exempts from the definition of Government of Venezuela “any United States citizen, any permanent resident alien of the United States, any alien lawfully admitted to the United States, or any alien holding a valid United States visa.”  Further, GL 32authorizes U.S. persons resident in Venezuela to engage in ordinary and necessary personal “maintenance” transactions, including “payment of housing expenses, acquisition of goods or services for personal use, payment of taxes or fees, and purchase or receipt of permits, licenses, or public utility services.”

Such measures targeting an entire government have rarely been used by the United States, and there are many questions about how the restrictions and related authorizations will be interpreted and applied.  As Bolton observed, “This is the first time in 30 years that [the U.S. is] imposing an asset freeze against a government in this hemisphere.”

Effect of the Sanctions

There has been some confusion in the media over the breadth of the measures.  Some reports have mischaracterized the Order as a “total embargo;” however, the scope of the Order is limited to property, and interests in property, of the Venezuelan government, its agencies, instrumentalities, and entities owned or controlled by these.  Because many major Venezuelan government entities have already been designated as SDNs in earlier actions, including PdVSA and the Central Bank of Venezuela, the measures appear to be only an incremental expansion of the existing sanctions program.

More significantly, the Order creates a secondary sanctions regime for OFAC to designate non-U.S. parties who continue to do business with the Maduro government.  While these secondary sanctions are most likely to target Cuban, Russian, and Chinese entities that continue to provide aid to the ailing regime, all non-U.S. persons engaging in transactions in the country should carefully assess whether those transactions could benefit the government.  In particular, companies trading with Venezuela should conduct due diligence sufficient to ensure that their counterparties are not owned fifty percent or more by the Government of Venezuela, or are not otherwise controlled by the government.

In addition, from a practical standpoint, although the sanctions only apply to Government of Venezuelan and related entities, the measures may cause financial institutions, insurers, freight forwarders and other companies – who often apply a heighted level of compliance going beyond the minimum required by OFAC – to avoid dealing with Venezuelan entities altogether.

The measures against Venezuela could also escalate existing tensions with Russia and China if the sanctions further restrict the countries’ access to Venezuelan oil.  Russia and China, which have continued to back the Maduro regime, currently import Venezuelan oil as part of a debt relief program.  China is slated to continue receiving oil from Venezuela until 2021, so it stands to suffer substantial losses if it is unable to continue the shipments.  This uncertainty comes in the midst of deteriorating relations between the United States and China due to the ongoing trade war, relations which suffered another blow this week when the Trump Administration labeled China a “currency manipulator.”

U.S. DOLLAR PROVIDES THE MUSCLE FOR ECONOMIC SANCTIONS

Money Talks

From drug kingpins to terrorists and from human traffickers to money launderers, the United States has nearly 8,000 economic sanctions in place, and the list is growing. Particularly in the post-9/11 era, the U.S. government has leveraged the global preeminence of the U.S. dollar to turn off spigots of funding for sinister activities and unwanted behaviors by state actors.

Among additional sanctions against Iran, Russia and Venezuela, The Trump administration earlier this month tightened travel restrictions to Cuba stating, “Cuba continues to play a destabilizing role in the Western Hemisphere…these actions will help to keep U.S. dollars out of the hands of Cuban military, intelligence, and security services.”

The muscle behind an array of U.S. financial sanctions derives from the reach and power of the U.S. dollar as the “lead currency” in the global economy. This status makes it possible to not only prevent U.S. individuals and companies from doing business directly with a sanctioned entity, it makes it risky to do business with third-country companies that do business with sanctioned entities. Acutely aware of their vulnerability, non-U.S. companies also frequently take steps to minimize their exposure to possible violations of U.S. sanctions lest they jeopardize their access to the U.S. financial system.

The U.S. Dollar Reigns

How strong is the dollar’s foothold in the global economy? The U.S. dollar was used in 88 percent of global foreign exchange transactions in 2016. For comparison, the euro was the medium of exchange in 31 percent of transactions in 2016, the Japanese yen in 22 percent, the British pound in 13 percent, and China’s renminbi in four percent (as two currencies may be involved in exchange, these numbers will add up to more than 100 percent).

Companies selling their goods and services outside the United States often accept dollars as payment because they can easily turn around and use dollars to pay for imported products and inputs. Or, they can hold onto their dollar revenues with confidence they are storing value.

Why is the Dollar Preferred?

The dollar is the world’s lead currency because it meets three key conditions.

First, the dollar is fully tradable and exchanged at relatively low costs. The U.S. government does not restrict the purchase or sale of the dollar.

Second, the dollar holds its value against other currencies. The United States is still considered a stable and open market economy, current tariff vagaries notwithstanding. At the end of last year, just under 62 percent of all central bank reserves were held in U.S. dollars.

Third, the United States is still the largest economy in the world, equivalent to 24 percent of global GDP. Below is a snapshot from the International Monetary Fund comparing the world’s largest economies. We have a large money supply, providing liquidity for the global economy.

Into the Arms of Another

Some have argued bad actors like North Korea will find always find ways to evade U.S. sanctions. Buyers of Iranian oil will seek alternative currencies for their transactions, both diluting the effect of sanctions and hastening reduced dependence on the dollar.

Several European countries developed a clearinghouse to enable companies to avoid the U.S. financial system in transactions involving Iran as part of their effort to salvage the nuclear pact the Trump administration pulled out of last year before restoring a slew of sanctions against Iran.

Despite initial discussions about a wider scope, Europe’s Instrument in Support of Trade Exchanges (INSTEX) will, at least for now, only facilitate trade in humanitarian goods such as pharmaceuticals, medical devices and agri-food products, all of which are already permissible under U.S. sanctions. Despite European government grumbling about being beholden to the U.S. dollar, there appeared to be little appetite on the part of European companies and commercial banks to risk U.S. penalties by using such a clearinghouse for other types of transactions.

Will the Euro or Renminbi Overtake the Dollar?

Not anytime soon.

The euro covers a large economic zone featuring sophisticated financial market institutions, but the politics surrounding continued support by members of the euro zone and unresolved debt discussions with southern states (we were talking about Grexit long before Brexit) are holding the euro back in overtaking the U.S. dollar.

Although the renminbi’s share in global transactions is still low, it should be noted that usage and overseas holdings of China’s currency by individuals, businesses and central banks has expanded in the last decade, enabling China to break through in 2016 to join the top five most-used currencies. The Chinese government is making a big push to internationalize its currency through global infrastructure investment funds associated with its Belt and Road initiative and through renminbi-denominated commodities futures contracts, among other initiatives.

China’s currency, however, is not freely convertible, its performance has been volatile, and the degree of state and private debt in China’s financial system remains murky.

The Dollar’s Achilles Heel

For the time being, most experts believe there’s no real threat to the U.S. dollar’s dominance. Europe would need to address skepticism regarding the monetary union’s future, China would need to implement significant reforms to its financial sector, and much-hyped cryptocurrencies still have long way to go to challenge the conventional system of global payments.

These are all big “ifs”. Instead, the dollar’s Achilles’ heel is of our own making. One of the biggest risks to the dollar’s long-term value is continued fiscal imbalances in the United States and the sustainability of our debt burden.

Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.

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

Do Tariffs Cause Prices To Go Up? Not Necessarily

President Trump recently raised tariffs on $200 billion worth of Chinese exports and threatened to impose import duties on all Chinese goods coming into the United States. Will American prices rise substantially as a result? This is a loaded question, because contrary to popular belief, tariffs don’t always raise prices.

One alarming study from The Trade Partnership, a think tank, estimates that an average American family of four may have to pay an extra $767. And if all Chinese exports are taxed, the cost could rise to more than $2,000.

However, the effects of tariffs on prices are not as straightforward as they may appear at first glance. Indeed, until the pioneering contribution by the late Lloyd Metzler, a University of Chicago professor, the question was not even explored. It was taken for granted that tariffs automatically raise the prices of imported goods. But Metzler’s article, known in the literature on international economics as the Metzler Paradox, changed this view once and for all. Let us analyze the problem without hysteria.

Tariffs have two effects on prices: one tending to raise them, the other tending to lower them. The overall impact depends on which effect is stronger.

It all comes down to supply and demand for goods in China. The United States is a large importer of Chinese products, so tariffs will cause a huge decline in American demand for Chinese goods because of the initial rise in prices. But as demand falls substantially, prices of exportable goods inside China will also decline substantially.

Assuming that transportation costs are minimal, as they are nowadays, the American price of a Chinese product is determined as follows: American Price = Chinese Price(1 + t), where “t” is the rate of tariff. From this formula, it is clear that there are two countervailing effects on the U.S. price of a Chinese good. A rise in the tariff rate initially tends to raise it, whereas the resultant fall in the Chinese price tends to lower it. The final effect depends on whether the Chinese price declines more or less than the rate of tariff.

As a simple example, suppose Walmart imports a shirt from China for $20, and then faces a 25 percent tariff on that import. If China’s price is constant, then the same shirt will now cost $24. But the Chinese price cannot stay constant. Since the United States imports a vast number of Chinese shirts, the demand for Chinese shirts will fall sharply, and that will lower the Chinese price. Say this price declines to $18, then a 25 percent tariff will raise its U.S. cost by one fourth to $22.50, which is still higher than its free-trade cost of $20.

At a Chinese price of $16, the tariff-inclusive price will be the same as the free-trade price. But if the Chinese price were to fall below $16, the cost to Walmart will be less than $20. Thus, it all depends on the forces of supply and demand inside China.

The extent of the Chinese price decrease depends on the cost of producing a shirt. If this cost is low, then the price decrease can be large in the wake of declining demand, because a producer can still make some profit. Since Chinese wages are much lower than American wages, the Chinese cost of producing a shirt is likely to be very low, in which case the Chinese shirt price can fall substantially. If that happens, American prices of goods imported from China could actually decline.

Indeed, this may explain why thus far the U.S. tariffs that were imposed on Chinese exports in September 2018 have not been inflationary. In fact, even the Federal Reserve has been surprised by the recent cooling of core inflation and, as a result, pledged not to raise interest rates any further.

So the American consumer has nothing to worry about, especially when the consumer can easily switch to imports from other countries.

Large trade deficits with China have decimated American manufacturing and wages. U.S. industries need a revival, and tariffs are indispensable toward this purpose. In 1800, at the start of the American republic, barely 5 percent of the U.S. labor force was employed in manufacturing; today, according to the Economic Report of the President, 2019, the share is about 8 percent — vastly below the 30 percent figure that prevailed in the 1960s. We are very close to where we were in 1800, and clearly, the manufacturing sector still needs a lot of support.

Note that under Abraham Lincoln tariffs were as high as 60 percent. As a result, following the Civil War, American manufacturing became the envy of the world. By 1900 the United States was among the nations with the highest living standard. Even though tariffs were high, prices fell or remained stable for several years.

Such price behavior helped raise the overall standard of living. When a 60 percent tariff rate could not harm the American consumer, how can a mere 25 percent? Free trade has been the holy grail of international economics for decades, but historically, the fastest growth in the American living standard has occurred under the umbrella of tariffs.

Ravi Batra is a professor of international economics at Southern Methodist University, Dallas, Texas. He is the author of The Myth of Free Trade. His latest book is End Unemployment Now: How to Eliminate Joblessness, Debt, and Poverty Despite Congress.

The Trade War Latest: What Supply Chain Professionals Should Consider

With the May 10 increase in duty rates on certain Chinese-made imports—and China’s subsequent retaliation on U.S.-made goods—I think we can all safely agree the United States and China are in a fully-fledged trade war. So, in an atmosphere of uncertainty, what are the key elements supply chain professionals should consider to stay ahead?

Impacts to cash flow

Over the last six months, increasing duty rates from both countries have impacted cash flows in several ways.

For U.S. exporters (especially in agricultural products), China sales are down, resulting in cash flow constraints on the income side. For U.S. importers, duty payments have increased substantially on certain products, leading to much higher cash flow consumption on the cost side.

The old adage that two things move in transportation, goods and money, has never been truer than in today’s climate. As I’ve been discussing the latest tariff changes with importers, a few recurring questions seem to be on most companies’ minds:

-Will our supply chain be more impacted by the policy changes affecting China-to-U.S. freight or U.S.-to-China freight?

-What ripple effects will those impacts have on other areas of our business?

-Will we need to increase our U.S. customs bond?

At C.H. Robinson, we’re constantly monitoring the situation and communicating with our customers on potential consequences for their businesses. Because we’re a comprehensive third-party logistics (3PL) provider—offering customs brokerage and trade compliance services as well as global ocean and air freight logistics—we use our unique market perspective to see end-to-end impacts and help manage our customers’ complete supply chains in unpredictable times.

Will there be a surge of imports trying to beat List 4?

In late 2018, many U.S. importers pulled forward inventory in anticipation of potential tariff increases threatened for January 1, 2019. That threat was ultimately delayed until May 10, but talk of a next round of tariffs has already begun.

This new list of tariffs would be known as List 4 and would affect almost all currently unimpacted Chinese-made goods. That list still must make its way through a formal review process, but the new tariffs could be implemented as soon as late July or early August. Whether we will see importers again pull forward their inventory to try and beat potential duty increases remains to be seen.

Changing U.S. domestic freight flows

One of the repercussions of the U.S.-China trade war that has not received as much attention is the impact of the dispute on domestic freight patterns.

Indeed, the trade war has disrupted some U.S. trucking lanes, including an out-of-cycle surge in demand in Southern California related to the pull-forward of inventory in late 2018. Additionally, frozen pork and chicken, typically exported to China, has been routed to domestic cold storage instead, straining domestic refrigerated trucking capacity.

Now that the cost to import from China has increased, companies may find it cheaper to fulfill product with pre-tariff inventory from a warehouse 1,000 miles away (instead of new inventory assessed a 25% duty). As a result, several questions are beginning to emerge: Will companies in fact try to draw inventory from far-away domestic warehouses with lower landed costs? Will new suppliers require the establishment of new lanes? How would these shifts impact carrier networks that gain or lose freight? Only time will tell.

When will this trade war end?

Whether your company has been positively or negatively impacted by the trade war, uncertainty abounds; current policies and rules (in addition to new ones) may or may not be in effect six months, one year, or five years from now. Therefore, for many businesses, scenario planning increasingly appears to be essential:

-What will your company do if current tariff levels are maintained for one month? Three months? Six months? Longer?

-What will your company do if tariffs increase? Are you making any process adjustments now to prepare for such a possibility?

-How would your company react to an announcement of a deal ending the trade war?

As you plan, make sure to bring your transportation provider and customs broker into the conversation to assess the transportation costs of new lanes, new suppliers, and shifting regulatory and compliance concerns. With close collaboration, deep business intelligence, and proactive planning, providers and businesses can make the most of these unpredictable times by mitigating risk and finding opportunity.


This originally appeared on chrobinson.com. Republished with permission.



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.