THE CHINA SYNDROME
When negotiating, when do you know if someone is bluffing or not? Do their facial expressions give it away? The tone of their voice? How about in the measured use of their words? I am referring to the startling announcement by Treasury Secretary Steven Mnuchin, who said, “I have an executive order prepared, that’s ready to go to the president that will authorize to stop doing trade and put sanctions on anybody that does trade with North Korea.” When asked if that includes China, he replied, “Stopping trade with anybody. Nobody would be off the table.”
I watched the interview and I have to say that Secretary Mnuchin’s delivery was believable. If you were playing hearts with him, you would have no idea if he was shooting the moon until he picked up the Queen of Spades. The man has a natural poker face. But really? Stopping trade with China? Think for a moment what that would do to U.S. manufacturing, where China has become so integral to our global supply chain. There are thousands of U.S. manufactured products where at least some components are made in China. Shut that down and don’t you also shut down U.S. manufacturing? At the very least it would be a major interruption where U.S. manufacturers would have to scramble to find other suppliers for those parts either at home or abroad. And then they would no doubt need to make modifications to accommodate the slight variances in the replacement parts from other suppliers, which could take months or longer.
Shutting down trade with China would almost be unthinkable. Almost. And that’s where China blinked. Well, sort of. China’s Central Bank told Chinese banks to wind down existing loans and to not make new loans to new North Korea customers. But what does that really mean? And more importantly, how transparent will any of that really be considering you are dealing with two Communist regimes?
That the U.S. would say it would consider stopping trade with China is drama enough, but the other side to that coin, of course, is that you have North Korea now saying that a strike against the U.S. is inevitable—and the country is threatening to test a hydrogen bomb. Never have the stakes seemingly been higher in the geopolitical trade arena than they are right now. We will be reading about this moment in history books as it has all the drama of the Cuban Missile Crisis. Yet, I defer to my original commentary a few issues back, which is: North Korea is misbehaving with China’s consent so that China can appear to reel them back in—in exchange for trade concessions from the U.S. As payment for their part in the charade, North Korea gets food and other essential trade items from China.
British PM Theresa May gets high marks for navigating her Brexit strategy thus far, albeit it is a work in progress. She is saying all the right things like, “No deal is better than a bad deal” and favoring a gradual implementation rather than “the cliff’s edge.” All of this, of course, is to calm markets. But the Scots, Irish and British have always found ways to thrive in uncertainty. In fact, they view it as … well, sporting, old boy. So don’t expect any fall off in Britain’s economy, despite threats and tantrums by EU ministers who are still fit to be tied that this is all happening. In fact, look for Britain’s economy to pick up steam as it sheds EU regulatory burdens.
And we now turn the rest of Soundings over to an excerpt from U.S. Secretary of Commerce Wilbur Ross’ column “These NAFTA Rules Are Killing Our Jobs,” which appears in full on www.globaltrademag.com.
As the North American Free Trade Agreement negotiations unfold, there is a lot of loose talk being exchanged about automobile parts going back and forth among the United States, Canada and Mexico. NAFTA supporters assert that the U.S. content in cars assembled in Canada and Mexico is particularly high and that therefore our $70 billion-plus trade deficits with our NAFTA partners are not worrisome.
[But] we cannot forget that the point of a free-trade agreement is to advantage those within the agreement—not to help outsiders. Instead, NAFTA has provided entry into a bigger market for outside countries, and the United States is paying the price. While NAFTA has achieved its goal of increasing three-way trade in absolute terms, American workers and businesses are not benefiting in a way that is fair and reciprocal.
What does this mean for U.S. jobs?
Hundreds of thousands of Americans go to work every day in the automobile manufacturing industry. The declining U.S. share of content in imports from Canada and Mexico puts those jobs at risk. The United States accounts for an overwhelming share of the total NAFTA auto market today—83 percent, in fact—yet American workers are not reaping the benefits of that purchasing power.
So, why is this happening?
NAFTA included “rules of origin” provisions that were intended to restrict the non-NAFTA content in final goods. Yet the numbers above show that the opposite has, in fact, happened.
Unfortunately, NAFTA rules of origin on automobiles listed the exact parts to which the rules of origin applied, and many of those parts are no longer used. Another reason is that the rules include a concept called substantial transformation, which means that if further processing of a non-NAFTA item is done by a NAFTA partner, the non-NAFTA items are “transformed” and are deemed to have been produced in the United States, Canada or Mexico.
These facts are why U.S. Trade Representative Robert E. Lighthizer announced that two major objectives for NAFTA are raising the total NAFTA content requirement and raising the U.S. share of that requirement, especially in autos and auto parts.
Autos and auto parts are particularly important because our combined trade deficit in autos and auto parts from Canada and Mexico is $84.6 billion annually, which is the vast majority of our total trade in goods deficit with our neighbors. Only $14.6 billion of that deficit is offset by surpluses in other product categories. That is why we have a NAFTA net trade deficit in goods of $70 billion.
If we don’t fix the rules of origin, negotiations on the rest of the agreement will fail to meaningfully shift the trade imbalance. Our nation’s ballooning trade deficit has gutted American manufacturing, killed jobs and sapped our wealth. That is going to change under President Trump, and rules of origin are just the beginning.
Relax. China Isn’t Taking Over!