Leibowitz on Trade and Foreign Policy—Change Affects Us All

On impeachment, the House of Representatives has launched a multi-pronged investigation into Ukraine and now Turkey. To recap, there are questions about whether President Trump conditioned aid to Ukraine on cooperation in getting damaging information about former Vice President Biden and his son Hunter. Several House committees have subpoenaed witnesses and several witnesses have already appeared. More are scheduled to testify (generally in sessions closed to the public) this week and thereafter. The White House is resisting the subpoenas, guaranteeing a court showdown affecting witnesses. The confrontation could lead to a House vote on impeachment as early as November, but the schedule is uncertain.

The impeachment landscape changed this week with the announcement that the U.S. was withdrawing troops (about 1,000 of them) from areas of Syria near the Turkish border. On Friday, President Trump had a phone call with President Erdogan of Turkey. According to Secretary of Defense Mark Esper, President Erdogan informed President Trump on Friday of an impending invasion into northern Syria. The secretary’s impression was that Turkey was not seeking approval from the United States. On Saturday, the invasion commenced. U.S. forces are leaving the area, abandoning the Kurdish forces there to their fate at the hands of the Turks, who regard the Kurds as terrorists. The Kurds were faithful allies, and played a leading role in defeating the Islamic State last year, not only in Syria but in Iraq, as well.

The political reaction to the U.S. withdrawal has been dramatic and bipartisan. For example, Sens. Chris Van Hollen (D-Md.) and Lindsey Graham (R-S.C.) have joined together to draft legislation refuting the president’s decision to withdraw troops from northern Syria and abandoning the Kurds. Cooperation between those two on issues of substance is quite remarkable in itself.

On foreign affairs, let’s tackle China first. In a move that had been predicted in some quarters, the U.S. and China agreed to a bit of a freeze in their trade war. On Friday, the two countries announced an interim deal giving a bit on both sides, but reserving the most serious issues for further negotiations. First, the U.S. will postpone tariff increases from 25 to 30 percent on about $112 billion of imports (List Four). The increases were scheduled to take effect Tuesday, Oct. 15. (Tariffs of 25 percent on these goods went into effect on Sept. 1.) There is no word yet on the pending increases on about $160 billion of imports from China that face increased tariffs effective Dec. 15.

In exchange for the U.S. forbearance, China has committed to purchase up to $50 billion in U.S. agricultural exports, according to the president.

Just last week, leading up to bilateral negotiations in Washington on Thursday and Friday, President Trump held his cards close concerning an interim trade deal with China. And a couple of months ago, he essentially ruled it out. This bit of progress on Friday indicates that an incremental approach to China has the upper hand for now.

More on China—Also last week, the Office of the U.S. Trade Representative issued two lists of product exclusions for imports from China. These exclusions are related to the “Section 301” tariffs on goods from China. The exclusions exempt from the S301 tariffs a number of steel-related products, such as steel gates and posts. While anyone importing from China needs to consider all the tariffs that could apply (Section 301 tariffs, Section 232 tariffs and antidumping and countervailing duties), the relaxation of the Section 301 tariffs on a few steel products is welcome news for some traders. On the downside, exclusions can lead to costs for American manufacturers. If your company makes products in the U.S. that require steel, exemptions from the S301 tariffs can put you in a worse competitive position.

Finally, the U.S. and Japan announced a limited trade agreement last week. It gives the U.S. some of the benefits in bilateral trade with Japan that it would have received had it remained in the Transpacific Partnership (TPP) agreement. It does not eliminate the possibility of more tariffs in U.S.-Japan automotive trade, and will not require congressional action to implement, because the U.S. did not make any agreements that require changes to United States laws.

Putting all these events together is confusing. But in summary, the situation as of today is as follows:

1. Impeachment is gaining momentum, which means that trade initiatives requiring congressional approval (especially USMCA) will probably not make much progress.

2. Expectations are rising for more progress in the trade war with China, perhaps leading to a rollback of the China Section 301 tariffs as early as next year. But a lot must happen to lead to a rollback. A freeze on new actions (perhaps including further postponement in the Dec. 15 tariffs) could happen in the coming weeks.

3. Turkey’s invasion of northern Syria to attack the Kurds has stoked bipartisan anti-administration fury in Congress. To address those concerns, the president may impose severe sanctions on Turkey. With the “tripwire” of a few dozen American troops removed, the next available remedy to punish the Turks could be economic sanctions, maybe severe enough to damage the Turkish economy. (Remember, the president has already tweeted about his ability to “totally destroy and obliterate” the Turkish economy.) This could be bad news for Turkish interests in the U.S., including many friends of long standing. The longer the Turkish incursion lasts, the more severe the risk of serious sanctions.

The situation is developing rapidly. Stay tuned—it will change by next week.

Lewis Leibowitz

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