Leibowitz: Negotiators Heading to Washington

With the Section 232 tariffs having survived their first legal assault, negotiators are coming to Washington. The NAFTA renegotiation seems to be approaching resolution. I expect that a permanent exemption for Canadian and Mexican steel and aluminum will be one of the results of that deal.

The first batch of exclusion requests for particular products have been posted on regulations.gov. There are 14 requests from nine different companies included in the first batch. Products include alloy, stainless and non-alloy steel. This is the tip of a large iceberg, according to available information.

The consequences of the second round of tariffs (the Section 301 tariffs proposed by USTR) continue to surface. The Information Technology Institute released a letter to Secretary of the Treasury Steven Mnuchin arguing against tariffs as a strategy.  “Our opposition to tariffs is pragmatic. Tariffs do not work.” True, but what does? ITIC argues for refocusing on building an international coalition “that can challenge China at the WTO and beyond.” The objective would be “to negotiate a balanced, fair, and reciprocal trade relationship, including implementation guidelines and accountability mechanisms.” The letter does not say how to get to an agreement on these issues without some notion of adverse consequences.

This is the dilemma—the Section 301 statute clearly demonstrates it.  If an act or policy of a foreign government is “unfair,” or violates a trade agreement, the United States is permitted to take unilateral action. In practice, since 1995, the U.S. has only taken such action after adjudication of disputes in the World Trade Organization. The Trump administration has decided that some actions by China, while they may not violate WTO or other international agreements, nonetheless are “unfair” and “burden” commerce. And what actions in response is the president empowered to employ? Tariffs and quotas, basically, leading it is hoped to negotiated settlement of differences.

This is what everyone (or at least most people) want. 

President Trump today, with Secretary of Agriculture Sonny Perdue in the room, praised American farmers as “great patriots,” willing to sacrifice (through taking retaliatory tariffs) for the common good. He called them “great patriots,” continuing to play the trade war card. Most sectors don’t want to be the casualties of that war.  Agriculture pays for the war through reduced exports and import-dependent industries (dependent on steel, aluminum, rare earth metals, electronics, etc.) pay the tariffs on goods from China and elsewhere. 

If negotiations are the answer, it seems we need to formulate the question: what do we need to agree on and how do we get there?

Most Americans agree that one goal is to secure adherence to rules of trade that China agreed to in 2001 when that country joined the WTO.  Several fora have (Joint Commission on Commerce and Trade (JCCT), Strategic Economic Dialogue, G20, APEC, etc.  Resolution of issues of intellectual property violations and forced technology transfer have been raised but not resolved. Since progress has been virtually non-existent, the Trump administration is not irrational to try a new approach. Looking back at Section 301, the approach they are trying via threats of trade restrictions is basically the only one they can try to spur negotiations. It hasn’t been tried by previous administrations because the harms of trade actions always outweigh the benefits.  Let’s hope, as the markets seem to believe (at least for today), that the threats will bring both countries to the table. If threats don’t work—what then?

Lewis Leibowitz

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