Riding the Waves of Trade Uncertainty

How do you spell trade? Uncertainty. 

Recent trade wars between the U.S. and others have engendered uncertainty, which has slowed the global economy and business investment. World trade growth slowed significantly in 2019, as increasing import costs and restricted market access hindered activity. Current U.S. trade policy that boxes out foreign partners could make the United States a rule follower rather than a rule maker. In his remarks at the World Economic Forum in Davos, President Trump referred to the “transformative” changes his administration is making in trade policy. It is unclear what the outcome of these transformations will be, and some foreign powers seem to be slow walking on trade relations with the United States as they await the outcome of the U.S. presidential election in November.

Making Progress with USMCA

The United States-Mexico-Canada Agreement (USMCA) has been called one of the most progressive trade agreements ever negotiated, including stronger labor provisions to support workers’ rights. The Senate passed the USMCA (H.R. 5430), which revised and updated the North American Free Trade Agreement (NAFTA), on January 16, with a bipartisan vote of 89-10. President Trump signed the USMCA into law on January 29 without inviting key Democrats who helped secure its congressional passage, including Speaker Nancy Pelosi (D-CA) and Ways and Means Chair Richie Neal (D-MA). Mexico has passed the deal and outlined a four-year plan for implementation of the labor provisions in the agreement. Canada’s House of Commons is expected to approve its implementing bill as soon as April.

Experts do not expect the USMCA to support significant job growth or increase trade between the member countries. Unemployment in the United States is currently the lowest it has been in fifty years. The White House has claimed the USMCA will create 600,000 new jobs, including 76,000 in the auto industry alone. Unions and industry doubt this projection, as the labor provisions and requirements for North American auto parts in the deal could increase production costs and subsequently reduce demand. The U.S. International Trade Commission reports a more modest projection of 28,000 auto jobs created. Additionally, it would only increase U.S. GDP by $68.2 billion, or 0.35%.

The agreement passed Congress with bipartisan support, but there are caveats. Senator Sherrod Brown (D-OH) voted for the bill, but stresses there is still considerable work to be done. The goal is to have the deal in effect by July, but implementation could stretch into 2021. Senator Pat Toomey (R-PA), who has said that the sunset provisions would limit trade and investment after 16 years and that the auto rules of origin would hurt economic growth, was the lone Senate Republican to oppose the deal. Opposing Democrats, such as Senate Minority Leader Chuck Schumer (D-NY) and Senators Bernie Sanders (D-VT), Kamala Harris (D-CA), and Cory Booker (D-NJ), had greater concerns with the legislation, as they didn’t think it went far enough on issues like the environment, enforcement, labor, and prescription drugs.

Some opponents expressed concern that the agreement incentivizes businesses to move operations to Mexico, where clean water and clean energy regulations are less stringent than in the U.S. In addition, opponents note that the USMCA significantly reduces legal protections for US companies investing in Mexico by eliminating nearly all investor-state dispute settlement provisions from NAFTA.

Senator Sanders has set himself apart from some in the 2020 Democratic field by opposing the USMCA. Former Vice President Joe Biden supports an update of NAFTA and has stressed the need for strong leadership in a trade relationship with China. Senator Elizabeth Warren (D-MA) once criticized the trade deal but voted in favor of its passage due to the addition of strengthened labor provisions demanded by Congressional Democrats. Mayor Pete Buttigieg and Senator Amy Klobuchar (D-MN) have also spoken in favor of the agreement.

The USMCA is generally viewed as a bipartisan victory and a step in the right direction for U.S. trade policy.

A Troubled Transatlantic Relationship

The European Commission has identified the U.S.- E.U. trade partnership as a driver of the global economy, since together their economies account for roughly half the world’s GDP. Tensions between the U.S. and E.U. member countries are complicating this integral relationship. The Trump administration’s weaponization of tariffs against other countries to coerce its desired trade outcomes has not been warmly received by the E.U.

Sources at the European Commission have indicated they may ease import barriers for U.S. agricultural products like shellfish. This attempt to get the U.S. to cut industrial tariffs would help stall negotiations until the 2020 election outcome is determined. The Trump administration has continued to impose tariffs on steel and aluminum. The administration has previously threatened tariffs on E.U. cars and auto parts, but recently pulled back as an apparent sign of good faith.

The U.S. Department of Commerce still has not publicized its report regarding the Section 232 tariffs on automobiles and auto parts, even though it was issued to the White House in February 2019. The report was the result of a Commerce investigation initiated in May 2018 to determine whether the administration retained the authority under Section 232 of the Trade Expansion Act of 1962 to impose tariffs on auto imports. Analysis suggests the administration did not retain this authority due to time limits set by Congress on the extraordinary power granted to the executive under Section 232. Further, the administration’s decision not to release the report to the public could be intended to leave the matter unresolved and to maintain the threat of auto tariffs on Europe.

President Trump blames European Commission restrictions for the $177.9 billion dollar trade deficit between the U.S. and the E.U. The European Commission is hoping to renew a July 2018 truce in which both parties agreed to scale back barriers to trading industrial goods, along with an E.U. pledge to import more soybeans and liquified natural gas. U.S. sanctions against the Nord Stream 2 Russian pipeline were intended to increase reliance on U.S. liquified natural gas and led the Swiss company Allseas Group SA to abandon development of the project. While the European Commission shares the United States’ concerns about reliance on Russian gas, it will continue to push back on unilateral U.S. trade actions, including tariffs.

European Commission President Ursula von der Leyen is expected to discuss transatlantic commerce with President Trump in Washington sometime early this year and the E.U. Trade Commissioner Phil Hogan will continue traveling to Washington on a monthly basis to work out a limited deal. Negotiations have not advanced as both parties are unwilling to cross red lines that would force them to re-evaluate the negotiation mandate. The recent recall of the U.S. Ambassador to the E.U. Gordon Sondland inserts more uncertainty into an already murky trade relationship.

The United States and France reached a truce in late January on their dispute over France’s proposed digital services tax (DST). In response to France’s proposed DST, the Trump administration threatened to ratchet up tariffs 100 percent, doubling the prices of French wine and other goods. The U.S. opposed France’s DST for being discriminatory against American tech companies. France backed down in January, saying it would suspend the collection of revenues from the tax. In exchange, the U.S. would suspend its tariff threats. President Trump claims victory for the French response following his negotiations with President Emmanuel Macron. 

An effort to compromise on a global digital services tax is underway. The recent Munich Security Conference in mid-February served as a venue for those discussions, though Great Britain’s representatives were notably absent. Facebook CEO Mark Zuckerberg attended the conference to advocate for the passage of a global tax to regulate tech companies. The Organization for Economic Cooperation and Development (OECD) has advocated for a global tax because it argues national taxes would trigger tariff wars, and the United States has reiterated its support (albeit cautious) for continued negotiations at the OECD on global digital taxation. If an agreement is not reached by the end of the year, France intends to resume collecting its national DST, which could reignite its paused tensions with the U.S. The upcoming G20 summit, scheduled for November 21-22 in Saudi Arabia, will be another platform for the EU and others to plead the case for a global digital services tax.

Great Britain officially left the E.U. on January 31, and the Brexit transition period is currently set to end on December 31. The U.S. is courting a bilateral trade deal with Great Britain that could be operative as early as next year. However, British trade representatives have made it clear that a trade agreement with the E.U. would take precedence over a transatlantic partnership. Britain’s recent decision to green light some of Huawei’s 5G equipment also might seriously set back any U.S.-U.K. trade agreement, but U.S. government officials have thus far not indicated the decision will affect negotiations.

Going Through Phases with China

President Trump recently signed a bilateral Phase One trade deal with China to ease mounting tensions. China will increase purchases of U.S. goods and will face greater trade restrictions but is not required to alter its industrial policy. The pact essentially de-escalates the trade war without addressing the imposed tariffs or the core policies that triggered the war in the first place, such as subsidies for state-owned enterprises and forced technology transfer. The provisions of the pact regarding the expansion of trade require China to purchase a minimum of $200 billion of U.S. goods and services over the next two years, continuing that trajectory beyond 2021. President Trump has said a possible Phase Two deal would remove all tariffs if the U.S. and China are able to reach a satisfactory agreement, but it is highly unlikely that the two sides will seriously pursue a comprehensive Phase Two deal this year.

The pact eases Chinese tariffs on U.S. agricultural products, which provides the industry with some restitution for the revenue lost as a result of trade tensions. Farmers in the soybean and pork sectors of the state’s agricultural industry are estimated to have lost millions of dollars in revenue as a result of tariffs, according to the Center for Agriculture and Rural Development (CARD) at Iowa State University.

There are global fears that the requirements placed on China in the Phase One deal will put other nations at an economic disadvantage. China would be buying goods and services it does not necessarily need to meet the $200 billion minimum, or would appear to be boxing out other trading partners in favor of the U.S.

In the meantime, there are 76,600 reported cases of the coronavirus and 2,200 deaths globally. There have been at least 1,000 reported cases and 11 deaths outside of mainland China. White House national security adviser Robert O’Brien has warned the outbreak could affect any agreements reached in the U.S.-China trade deal and could have a negative impact on global trade. China may not be able to reach its minimum required agricultural or energy purchases for the Phase One deal. The Ministry of Agriculture and Rural Affairs outlook committee says there could be a delay in China’s purchases of agricultural commodities but would still be able to fulfill the commitment within a year. The U.S. has not issued a quarantine on Chinese imports, but health screening checkpoints at Chinese ports have delayed the movement of goods.

The Phase One is a tentative first step in a managed trade deal. Disruption is possible if China cannot meet its purchasing targets on time. The U.S. is tightening export controls, in part because of the Trump administration’s decisions to blacklist Huawei, with some exceptions. Tougher restrictions would prevent U.S. companies from supplying Huawei with tech supplies such as semiconductors and chipsets through foreign subsidiaries. There has been pushback on this domestically, as this would limit revenue needed for research and development of these technologies.

The Department of Justice (DOJ) also recently indicted Huawei and its Chinese subsidiaries on charges of racketeering, stealing trade secrets, and evading sanctions. Huawei has publicly rejected this indictment. This could further legitimize the Trump administration’s call to foreign allies to reject the implementation of Huawei’s products in their nations. The E.U. has been relatively hesitant to rebuff China for fear of the negative ramifications it could have on trade. Even so, a general transatlantic consensus was met at the Munich Security Conference for a tough international stance against China and a national security approach to 5G deployment.

Building Relationships with India, Kenya

President Trump is scheduled to travel to New Delhi on February 24-25 to enter a limited pact that would give India increased market access to medical devices and agricultural products made in the U.S. There has been a snag in negotiations as neither side is willing to budge on key issues including market access and data localization. The U.S. wants to remove price caps on medical devices, while India does not want to reduce import duties on all mobile phones. Indian Commerce Minister Piyush Goyal and U.S. Trade Representative Robert Lighthizer agreed not to rush into signing a deal and would revisit the issue following the presidential election. During his visit, President Trump will instead focus on pending defense and energy deals. He is also scheduled to meet key business leaders in the oil and gas industries to discuss job creation and manufacturing in the U.S.

The Office of the United States Trade Representative (USTR) is looking to establish a strategic trade and investment relationship with Kenya to improve U.S. access to East Africa and to seize opportunities in the economic epicenter. A successfully negotiated deal with Kenya would be the first U.S. trade deal reached with a sub-Saharan African country. In August 2018, President Trump and Kenyan President Uhuru Kenyatta began the U.S.-Kenya Trade and Investment Working Group to start the conversation on a bilateral free trade deal. Discussions within the working group have been ongoing, and this month President Trump announced the U.S. would begin formal negotiations to pursue a deal. A U.S.-Kenya trade relationship would benefit the agricultural and textile industries, as well as counter Chinese economic expansion on the continent. Some warn that a bilateral deal with Kenya, a member nation of the African Continental Free Trade Area (AfCFTA) would lead to trade deflection, an invalidation of the AfCFTA, and obstacles to regional and continental integration.

Trade: U-N-C-E-R-T-A-I-N-T-Y

The White House chief economic advisor Tomas Philipson said on February 20 during a briefing on the Annual Economic Report of the President that “uncertainty generated by trade negotiations dampened investment.” A recent Federal Reserve study seemed to corroborate this claim by suggesting trade uncertainty could reduce the U.S. gross domestic product (GDP) by about 1%.

February 28 is the USTR deadline for Congress to receive an annual report on President Trump’s trade agenda. The recently released White House budget proposal notably increases funding for the USTR and trade enforcement. Led by U.S. Trade Representative Robert Lighthizer, the Trump administration’s trade team is focused on negotiations with the European Commission and Great Britain now that the USMCA and the Phase One deal with China have been finalized from the U.S.’ perspective. Talks with China on a Phase Two deal are underway but are not expected to conclude until early November, post-election.

American workers face looming uncertainties. The promise of significant job growth seems unlikely to be delivered soon. Consumer goods may become more expensive, hitting households hard and stunting economic growth. The best they can hope for presently are eased tensions with potential foreign trade partners and a speedy international approval of USMCA.

Several trade deals are in the works as the election cycle heats up. Numerous countries are keeping their heads down on trade until November, when it will be more certain whether trade discussions will continue the same trajectory or will change course under new White House leadership. Voters will have to wait as these deals are fleshed out and the presidential election unfolds to have a better view of the trade landscape going forward.

How can we hope to spell trade by the end of 2020? Clarity.