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U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

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U.S. HITS RUSSIA & VENEZUELA WITH TOUGHER SANCTIONS

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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.”

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U.S. Strengthens Sanctions Targeting the Government of Venezuela

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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.”

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U.S. DOLLAR PROVIDES THE MUSCLE FOR ECONOMIC SANCTIONS

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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.

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Do Tariffs Cause Prices To Go Up? Not Necessarily

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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.

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The Trade War Latest: What Supply Chain Professionals Should Consider

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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.



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

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“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.

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2019 China-California Business Forum Focuses on Sub-National Cooperation

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California’s trade and investment involvement with Chinese provinces will take the spotlight at the third annual 2019 China-California Business Forum scheduled for June 5th in Los Angeles. An estimated 150 top Chinese business leaders are expected to attend with the goal of developing
business opportunities between California and Chinese business leaders.

“As the Chinese Secretariat of the China Provinces and U.S. California Joint Working Group on Trade and Investment Cooperation, CCCME together the seven member provinces all attach great importance to the China-California Business Forum and will actively participate in it as always. Over the past few years, as it has become an important platform of facilitating more exchanges and cooperation between Chinese and Californian businesses, the Forum has been fully recognized by Chinese enterprises and has become an annual focus of China-U.S. sub-national cooperation,” said Liu Chun, Vice President of CCCME.

The forum will take place in downtown at the Millennium Biltmore Hotel and dedicate a full day of various sessions discussing trade and investment, clean-tech, cross-border e-commerce, advanced manufacturing, and more.

“Sub-national cooperation is the foundation of China-U.S. economic and trade relations. The China-California Business Forum plays an important role in promoting this cooperation. The Forum is a joint effort by both sides. It not only brings business opportunities, but also enhances China-U.S. sub-national exchanges and cooperation. I look forward to welcoming more Chinese and California business leaders at the event,” said Amb. Zhang Ping, Chinese Consul General in Los Angeles.

Despite previous trade tensions between the two economy’s, business executives are displaying optimism for both sides to reach an agreement through bilateral trade discussions. This year’s Business Forum will ultimately support efforts to strengthen ties and develop mutually beneficial business initiatives.

“California was the number one recipient of foreign direct investment from China, totaling more than $16 Billion in 2017. We are also home to a vibrant Chinese American community. This forum will build on our strong business and cultural ties, strengthen our international partnerships, and grow our economy.” Said Lt. Governor Eleni Kounalakis.


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ITC Report on NAFTA Revision Doesn’t Impress Democrats

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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.

Archives, Commentary, Global Trade Daily

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

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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.

A 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.

Archives, Commentary, Global Trade Daily

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

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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.