Peter Friedmann’s View from Washington DC -- December 2019
China – Human Rights Will Determine Outcome of the Trade War
Mexico – USMCA Getting Close
If there has been bipartisanship on the Hill on anything, it’s on the current US-China Tariff War, and now, in more recent weeks, on addressing China’s human rights practices. In fact, the US response to China’s human rights practices may determine the outcome of the tariff war. It is already impacting negotiations.
First, the US -China trade relationship, specifically, the US imposition of increased tariffs on imports from China (and China’s retaliatory tariffs): Both D’s and R’s tell Trump to stay tough. Better come up with something good – get China to change its bad trade practices; we (the US trade community) need to get something for the pain caused by the tariffs.
Let’s remember, no trade deal has ever been popular on Capitol Hill. If they pass, they do so just barely, with vigorous and bitter opposition. Such was the case with NAFTA 30 years ago, and with allowing China into the World Trade Organization. The Trans Pacific Partnership was opposed by both the R and D Presidential candidates, and defeated in a test vote in the House. So whatever deal we get on NAFTA’s replacement, the US-Mexico-Canada Agreement (USMCA) or with China on tariffs, half of Congress will oppose it – most for political reasons, some for substantive reasons. Nothing new.
Will USMCA pass? Yes. Senate is committed to pass it, the President wants it done. Labor unions are saying Mexico’s commitment to increase wages and working standards are not good enough. Nonetheless, we sense Speaker of the House Pelosi is setting the stage for House passage in the next few months.
Back to China: Congress has already sent a veto-proof bill to the President addressing China’s brutal repression of civil liberties in Hong Kong. This put the President in a tough position – sign the bill and anger China in the midst of trade negotiations; or don’t sign it, and look weak on defending liberties of Hong Kong residents, He signed it. What this does to China’s willingness to make the trade commitments we seek, remains to be seen.
Now Congress is passing another bill that will anger China equally – sanctioning China for its repression of the Uyghur ethnic minorities in eastern China. The House passed a version by 407-1. Bipartisan condemnation. Soon a version of this bill will put the President in the same situation as the Hong Kong bill – should he sign it, standing up for human rights even though it will anger China and jeopardize the trade negotiations? My bet is he will do as he did with the Hong Kong bill – sign it.
Clearly, human rights has bumped trade from the limelight. Congress has not passed a bill on the ongoing the US-China trade dispute, but it is on the verge of passing the second bill sanctioning China for its human rights practices (the Hong Kong and Uyghur bills) . China has already retaliated, restricting US naval access to Hong Kong, etc.
In this environment, it difficult to expect much progress on the trade front. It is quite possible that the US tariffs on China’s exports, and China’s retaliatory tariffs on our exports, could remain in place for another year – at least until the November, 2020 Presidential and Congressional elections.
Peter Friedmann’s View from Washington DC
Congress is back from August recess. If they are going to get any legislation passed this year, it better start moving in September! Thus far, other than prison reform, Congress has produced precious little (but they passed a budget, so Federal spending continues at record pace).
Politicians make public statements ‘back home’ about gun violence; but once in their Capitol Hill offices, gun control legislation remains a topic that many Members of Congress try to avoid, while the others won’t compromise.
The world watches with trepidation: first Iran attacked tankers carrying Saudi oil. Now it has attacked Saudi Arabia and its oil production directly – will Saudi’s treat it as an ‘Act of War’? Will the US intervene?
The US-China trade dispute has done nothing but accelerate, with both sides rapidly approaching the bottom of their bags of trade weapons. Tariffs have been imposed now on most of what we import from China, (with a few exclusions). And China has reciprocated on our exports. We’re not done; the President continues to ratchet up tariffs – from 10% to 15% to 25%, changing the effective dates on short notice, keeping both the Chinese trade negotiators and all the US businesses, guessing. The biggest “List 4” on all consumer goods, has been announced, many are now at 15% tariffs, with the very ‘sensitive’ imports such as cell phones, electronics, televisions, footwear, apparel, going up to 15% in December…unless the President feels a delay (or acceleration) is warranted to get China to a deal.
How long will the US-China trade war last? Good question, particularly since the President seems to be supported, or at least not opposed, by most Members of Congress, both Republican and Democrat. In fact, shortly before the President declared China to be a currency manipulator, the Senate Democratic Leader urged the President to do so. Overall, Democrats and Republicans continue to support a tough position versus China to address intellectual property theft, cyber security and hacking, counterfeiting, technology transfer. Meanwhile Wall Street gyrates violently
A glimmer of hope: lower level US and Chinese trade negotiators are wrapping up meetings here in DC, which were sufficiently promising to set the stage for senior trade officials’ negotiations in coming weeks. At least they’re talking again.
Meanwhile hundreds of imports from China have been excluded from the tariffs following petitions to, and review by the US Trade Representative. That process remains available to those US importers who can make the case for exemption from the tariffs.
What about Japan? Trade negotiations promise some new opportunities for US ag to enter the Japanese market duty free or with reduced barriers – except of course, rice, maybe beef; Japan wishes to protect its domestic producers from competition from US imports. It does not appear that Japan will budge on the President’s desire to limit the imports of autos from Japan. So it will be a limited agreement.
More challenging is the US-European Union trade relationship. The World Trade Organization ruled that the EU unfairly subsidizes Airbus, and authorizes billions of dollars of US retaliation in the form of higher duties against EU products entering the US, such as wine, cheese, etc. EU isn’t having any of it.
The southern border, recently the center of attention, has quieted down. The number of immigrants approaching the border have dropped dramatically as Mexico has acquiescence to President Trump’s demands that it enforce its own southern border. This has curtailed the flow of people from Central America.
It’s not only tariffs that challenge international trade: international transportation is increasingly imposing costs on importers and exporters.
An international mandate to ocean carriers to shift to expensive “low sulfur fuel” by January 1, 2020 is resulting in surcharges on importers and exporters.
Congestion at US ports is caused by marine terminal inefficiency, ocean carrier consolidation and massive new vessels with capacity that overwhelms many US marine terminals. Meanwhile, political and labor interests limit automation that would address congestion, creating at times a debilitating bottleneck on US international commerce. The Federal Maritime Commission may act to stop ocean carriers from imposing costly penalties on US exporters, importers, and truckers when their containers are delayed due to this congestion.
If surviving legal challenges, California's newly enacted legislation to limit Independent contracting in transportation will be felt nationwide. Getting cargo in and out of California ports will be more expensive; Uber and Lyft also subject to this new law, are fighting back.
We have the lowest legal truck weights in the world. The cost on US commerce is significant: it takes 4 trucks to carry the same amount of cargo carried by 3 trucks in Canada, Mexico, Europe, etc. Decades of effort to bring US truck weights up to global standards continue to be thwarted by the railroads.
Lots of challenges, lots of Presidential campaign talk, but not so many solutions…
Peter Friedmann’s View from Washington DC – August 2019
The August recess is usually when things slow down here in Washington DC. It’s been over a month of hot and humid weather. Congress has produced precious little (but they passed a budget, so they and the President could continue to spend money at record pace). Everyone is ready to leave.
But this year seems different. Instead of slowing down, it seems that things are accelerating. Gun rampages seem to be more frequent, and more deadly. Every few days there’s another place in this country where politicians make brave statements about how the madness must cease.
In the Straits of Hormuz, Iran is attacking oil tankers - chafing under sanctions imposed by the US and allies to curtain that country’s nuclear program and funding of terrorism.
The US-China trade dispute has done nothing but accelerate, with both sides rapidly approaching the bottom of their bags of trade weapons. Tariffs have been imposed now on most of what we import from China, (with a few exclusions). And China has reciprocated on our exports. We’re not done; the latest “List 4” imposing 10% tariffs on all consumer goods, such as telephones, electronics, televisions, footwear, apparel, will be effective in just 3 weeks.
As if agriculture and forest products exporters needed any more evidence of the downward spiral of this trade dispute, each side continues to ratchet it up. Over a year ago, China’s first retaliatory target was US ag exports. Then negotiations continued, and China promised to buy a lot of soybeans. Then President Trump announced billions of dollars of purchases of ag from US producers who had lost sales in China. Then China reneged. Then USDA Secretary Sonny Perdue announced another round of purchases. Then the President announces more tariffs (List 4) finally tariffing all remaining imports from China. China retaliates by promising to ban imports of US ag. The President declares China to be a Currency Manipulator. What’s next?
Countries try to manipulate the value of their currency downward in order to make their exports more affordable (and it makes imports more expensive). The trouble is, that the typical enforcement tool against a “Currency Manipulator” is to impose punitive tariffs, but that is difficult to do when we already have imposed tariffs across the board. The only weapon left is to increase existing tariffs further; the imports that are now subject to 10% tariffs are candidates for further tariff increases.
How long will the trade war last? Good question, particularly since the President seems to be supported, or at least not opposed, by most Members of Congress, both Republican and Democrat. In fact, shortly before the President declared China to be a currency manipulator, the Senate Democratic Leader urged the President to do so. Overall, Democrats and Republicans continue to support a tough position versus China to address intellectual property theft, cyber security and hacking, counterfeiting, technology transfer. Meanwhile Wall Street gyrates violently.
One area that does seem, ironically, to be quieting down is the southern border. Just two months ago Customs and Border Protection was forced to redeploy its inspectors and other personnel from airports and seaports around the country, to assist with the deluge of immigrants and cargo. Members of Congress were concerned that cargo flows through their constituent international trade gateways would slow. But this week CBP has announced that those individuals have been returned to their posts, suggesting that things are indeed settling down, at least for now, on the southern border. Thankfully…but we are nervous, what’s next on that border?
Now, the 2020 Presidential campaign has begun; debates underway. Each candidate must strive, every day, to stand out from the crowd, to do and say whatever it takes to garner attention, media coverage. The media amplifies everything they say -- the good, the bad, the ugly. The noise is getting louder.
No, this is not the August recess we used to look forward to.
Peter Friedmann’s View from Washington DC
The US -China trade relationship is changing in ways that are defying expectations. As the US adapts, we are seeing far reaching impacts on our domestic economy - although it is too soon to know whether these will be positive or negative in the long term.
The tariffs have accelerated the trend which already existed: the transition of sourcing away from China to other countries, such as Vietnam, and even further afield. But the pace is even faster than most expected.
In turn, the international logistics to carry those consumer and other goods from the new source countries (such as Vietnam, Indonesia, India, Philippines) to the United States is changing much quicker than predicted.
Ocean carriers are reducing the number of sailings and freight capacity from China to the US, while increasing the number of sailings from South Asia, such as Vietnam. If the origin is SE Asia or South Asia, transit to the US can be more efficient via Indian Ocean/Suez Canal (as opposed to Trans-Pacific). The ships taking this route, arrive at US East Coast ports. Ocean carriers are increasingly choosing to land imported consumer goods at these ports, as they are closer to 2/3 of the US population.
The impact on the US logistics and supply chain will be substantial. More cargo for Eastern railroads, less cargo for Western railroads; more cargo moving across Eastern docks, and less cargo moving across West Coast docks. More work for trucking, longshore, warehousing on the east and gulf coasts, less on the West Coast. Some will be winners, some will be losers.
All of these changes will take time to work out, but the point is that our US-China trade dispute will have long term impacts much deeper into the US economy than simply an increase in the price of some goods coming from China.
At the same time, China is feeling pain from the tariff battle. China appears to be trying to find ways to walk back some retaliatory tariffs it imposed on US exports The US implemented an exclusion process by which a US manufacturer or supplier could seek exemption from specific tariffs we have imposed on certain imports from China. Now China is doing the same. Chinese importers can petition the Chinese government to create an exclusion from its retaliatory measures against US exports. For instance, China textile mills are petitioning the Chinese government to lift the tariffs it had imposed on US cotton.
This is something we did not anticipate, thinking China’s President Xi would have full control and not allow any exceptions from his mandated retaliatory tariffs. It is now clear that President Xi does not exercise the control over China's trade policies that many had initially thought. He has had to back track due to pressure from so called China's hardliners. Who are they?
Many do not know that the Chinese military also controls and owns elements of the China's economy, including manufacturing plants -- something unheard of here in the US. It has added complexity to President Xi's ability to negotiate a resolution of the US China tariff dispute.
And now for the real unexpected -- some believe there is diminishing incentive to resolve the trade dispute. Obviously a resolution of disputes requires compromise on both sides. If compromise is viewed as weakness, then we could expect neither President Xi nor President Trump to be eager to compromise. Here in the US, Congress (both Republicans and Democrats) remain largely united in supporting the tariffs imposed by President Trump. So where is the political motivation for the President to compromise, to retract tariffs? And if Chinese importers are successful in getting China to lift its tariffs on some US exports, particularly in agriculture, the pain felt here in the US will be diminished.
All this suggests that the tariffs may remain in place for years to come while the global logistics and transportation network, across the oceans and within our country, will continue to shift --- impacting employment and economic health of communities in ways that were unexpected before the tariff dispute began.
Peter Friedmann’s View from Washington DC
The Most Contentious Time
Not sure it is possible to recall a more contentious time here in Washington DC. It seems that every issue, across the entire political spectrum, is front and center, all at once. Each day brings a new issue, and another controversy. It really is unprecedented. Let’s take a look.
International trade used to be one major issue at a time; now it’s all countries, all issues, all the time.
25 years ago, NAFTA was the only trade issue on the table for at least three years. Now, its new iteration, USMexicoCanadaAgreement (USMCA), which arguably has even broader scope and impact than NAFTA, is only one of many issues the President, Congress and the public are dealing with simultaneously. Not only one of many trade issues generally, but one of many trade issues with Mexico and Canada themselves!
Our dumping duties against Mexico and Canada aluminum and steel, are being lifted, but retaliatory duties by those countries – will they be lifted, and when? (Meanwhile aluminum and steel tariffs remain on exports from other countries.)
The softwood lumber dispute has never really been settled with Canada.
US dairy access to the Canadian market is somewhat improved in the USMCA, but until that is signed, dairy remains a very sore point (in some key states for the 2020 Presidential and Congressional elections).
Florida tomato growers have been successful for several Administrations, gaining duties against Mexican tomatoes, now at 17+%. If you’ve gone to the supermarket, compared Mexican and Florida tomatoes, well, enough said.
So many other trade issues on the table:
China of course -- the biggest one, because it impacts virtually everything imported, exported, sold, grown, harvested, manufactured in the United States. We are now almost as far as we could go when it comes to tariffs. Shortly, both United States and Mexico will have imposed tariffs and retaliatory tariffs against everything that each of our countries imports from the other. Now the only avenue is to further increase the existing tariffs, which both China and the US have just done in the first weeks of May -doubling the existing tariffs. And we’re not done yet, because we had not yet reached an agreement between the US and China or more specifically, between President Trump and General Secretary/President Xi
The Generalized System of Preferences provides for zero import duties on many products from developing countries. It’s also in the crosshairs. We have rescinded GSP eligibility for Turkey, and announced intention to do the same to India. Frankly, Third World developing countries which needed this help in the past, may no longer need that assistance. In many cases they are competing with US production. We have been expecting some countries to lose the benefit. Brazil may be next.
The US and the European Union are as playing footsie on trade, but serious negotiation for a trade is stymied by the France’s refusal to include its rigid agriculture protections. Meanwhile US agriculture access to European markets is the highest priority for the US.
Brexit. On again, off again. The President has vowed to immediately initiate negotiations for a free trade agreement between the US and England, should Britain exit the European Union. So we wait.
Automobiles. The President has long been irked that our import duties on automobiles from countries such as Germany, China, Japan, Italy are so much lower than what those countries impose on our auto exports. (the US-Korea trade agreement has sufficiently addressed automobiles, at least to the President’s satisfaction). USTR has drafted significant new import duties on autos from those countries, now on temporary hold.
Plenty of other issues rocking the entire political spectrum, Congress and the American public. Here are just two:
Six house committees are spending day and night investigating the President, his family, his businesses, his Attorney General, ties with Russia, etc.
Abortion, long one of the most contentious political, social and religious issues, has re-emerged following actions by several state legislatures. It is now becoming a centerpiece of congressional debate, political campaigns, and will make its way to the Supreme Court.
Compromise, is it possible?
We now have 24 individuals who believe they could do a better job as President than Mr. Trump. Who is to say they couldn’t win election – nobody would have bet on either Obama or Trump 18 months before they were elected.
Many of the candidates are Members of Congress or Governors. Obviously distracted from those duties, as they must devote 24/7 to campaigning. But campaign speeches tend to to generate more controversy, not less. Positions are hardened, becoming increasing extreme to appeal to primary voters. What is said on the campaign trail is brought back to the Senate and House chambers, making progress, (which always requires compromise) very very difficult.
Welcome to Washington DC June 2019.