December 13, 2018

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December 12, 2018

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December 11, 2018

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US Makes Good on Trade Threats – What Now?

We are moving into uncharted waters with the Trump Administration’s announcement that the U.S. will move forward to impose $50 billion in tariffs against a wide range of Chinese products, with the first tranche of $34 billion beginning on July 6; as well as tariffs against Canadian, Mexican, European and Japanese steel and aluminum imports.  Retaliation against U.S. exports by China and key U.S. allies will most certainly follow.  President Trump has also threatened tariffs on an additional $100 billion ($200 billion as of Monday, June 19) in imports from China, and on imported autos from Germany, Japan and elsewhere.

The administration’s trade actions against China have elicited bipartisan support, from Democratic leaders as well as Republican leaders.  There continues to be legitimate frustration with distortive Chinese trade practices, from heavy state subsidies of Chinese companies to forced technology transfers and joint ventures with Chinese companies as a condition of doing business in Chinese, along with outright theft of American and western technology.  There is less political support, and indeed, bipartisan concern about the imposition of tariffs against our closest  Americans allies on “national security” grounds.

The President is moving from threats of trade sanctions to the reality of multiple simultaneous trade wars, and another conflict involving possible U.S. economic sanctions against European companies over the U.S. withdrawal from the Iran nuclear agreement.  We are currently facing economic conflicts the likes and scale of which we have not seen in modern times.

But these are not only trade disputes. At risk is nothing less than the future strength of the western alliance; the rules-based World Trade Organization (WTO), which the U.S. government took the lead in creating to resolve trade frictions and which been supported by Republican and Democratic presidents; and the stability of relationship between the U.S. and China, the largest and second largest economic, political, and military powers in the world.

Economists and trade experts disagree on the direct economic impacts of the trade actions. Some see no more than a 0.2% hit to U.S. GDP in the months ahead. Stock markets have so far largely shrugged off the trade disputes, focusing instead on the strong U.S. economy. But others point to signs of strain in global supply chains, rising prices for crucial raw materials, stagnant air freight and container shipments, and the possibility that the impact of these disputes on business confidence may well foreshadow larger economic disruptions.

At the least, the imported products subject to 25% (or even higher) tariffs will act like a tax on those products, and the products into which they are incorporated, making them more expensive to U.S. consumers and producers.   At most, these actions and those which may come, could provoke a far more damaging cycle of protectionist measures by the major trading countries.

In retaliation for the U.S. tariffs, China has published a list of 659 U.S. products to be targeted, with tariffs on the first group of 105 to begin on July 6 (the same day the U.S. sanctions on Chinese products would bite) including U.S. agricultural products such as soybeans, whisky, orange juice, salmon, cigars, and automobiles,  The rest of China’s retaliatory tariffs on $16 billion of U.S. products — chemicals, pharmaceuticals and machinery — would go into effect if and when the U.S. imposes the balance of its own $50 billion sanctions.   Moreover, China has scrapped the agreement Commerce Secretary Wilbur Ross recently secured to lower their huge trade surplus with the U.S. by purchasing up to $70 billion of additional U.S. agricultural products, natural gas and other goods.

Likewise, the EU and Canada have listed U.S. products which would receive equivalent tariff increases to those the U.S. is imposing. China has already made clear as well that it will retaliate in kind if the U.S. imposes another $100 billion (now $200 billion) of tariffs threatened on an unspecified list of Chinese products.

U.S. trade actions against China, and their retaliation, have far broader implications.  This is a clash between a state-dominated economic system and a free market system.   This is a clash between China, and its 2025 Made in China Strategy, its aggressive military actions in the South China Sea and its State-led economic “Belt and Road” program to finance infrastructure programs to link large parts of the world to China, and the United States, which opposes these initiatives. The stability of the world order in the 21st century will depend significantly on how the two great powers bridge these vast differences in approach.

Some, though not all, of China’s untoward trade and economic practices can be attacked by the kind of trade actions in the WTO which the EU and Japan have recently launched. It causes far less friction if the WTO process, imperfect though it is, can be used to the maximum degree.  But recent statements by Trump administration officials cast doubt on their commitment to the WTO as an effective mechanism to address China’s unfair trade practices, and any we may find by other countries.

The U.S. urgently needs its allies in the difficult battle to hold China to account.  What is deeply concerning is that rather than reaching out to them to form a coalition against unfair Chinese trade and investment practices — which our allies would have been willing to do, given the harm to their own companies and industries — the administration took harsh actions against them.  This is dividing and weakening our traditional alliances, to the benefit of China.  In fact, the EU, Canada and Mexico have all initiated WTO cases against United States “protectionism.”

In the early months of the administration, the U.S. dropped out of the 11-nation Transpacific Partnership (TPP) trade agreement, leaving them to go it alone.  The strong leverage TPP would have provided against China’s aggressive expansion in Asia has now been lost.  The administration forced a renegotiation of the U.S.-South Korea Free Trade Agreement. The U.S. is also challenging the future of the North American Free Trade Agreement  (NAFTA) with Mexico and Canada, and engaging in vitriolic attacks on Canada’s prime minister, and European leaders.  And the imposition of the steel and aluminum imports against our closest European and Asian allies, not based upon unfair trade practices to be resolved at the WTO, but unilaterally on “national security” grounds, has deeply offended them.  Add that to the threatened action against the lifeblood of Germany’s and Japan’s exports, their automobiles, and there is the possibility of a perfect storm.

The risk is that the United States strongest allies – the EU, Japan, Canada, South Korea, Mexico — will not only retaliate in ways that further damage the U.S. and global economy, but ultimately will trade more with each other, and with China, than with the U.S.

Perhaps this is all a prelude to a grand bargain with our allies and with China.  President Trump did tell French President Macron last Friday that he would like to restart trade discussions with the EU.  But if not, we are entering into rough period with our closest allies, risking further rounds of growth-killing trade sanctions and setting the stage for a classic conflict between a rising power and established power.  History teaches us that such confrontations do not end well.

© 2018 Covington & Burling LLP

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About this Author

Stuart Eizenstat, international trade attorney, Covington
Senior Counsel

Ambassador Eizenstat heads the firm’s international practice.  His work at Covington focuses on resolving international trade problems and business disputes with the US and foreign governments, and international business transactions and regulations on behalf of US companies and others around the world.

During a decade and a half of public service in three US administrations, Ambassador Eizenstat has held a number of key senior positions, including chief White House domestic policy adviser to President Jimmy Carter (1977-1981); U.S. Ambassador to the European...

202.662.5519
Constance Anne Pence, Regulatory attorney, Covington,
Senior International Advisor

Anne Pence, a non-lawyer, provides clients with strategic advice to support their international business success in developed and emerging markets. She advises on international investment, corporate responsibility, public governance, trade and sanctions, project development and implementation, infrastructure and transportation, climate change and sustainability, and global health and pharmaceutical policy issues. A former international policy advisor to State Department and White House leadership, she has expertise on major OECD and emerging economies and developing countries and regions.

Ms. Pence has provided guidance and solutions to international energy and extractives companies in Africa, Asia, Europe, and Latin America; advised and represented coalitions of major global consumer product companies on global standards and policies with UN agencies and the OECD; assisted hedge funds and financial entities in assessing and managing market risk; advised on business opportunities and conditions in the Middle East; and supported efforts by major pharmaceutical companies to operate in and serve lower income markets and populations.

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