Tariff war and trade turmoil likely to continue into 2019

Only one month into 2019, and it has already become evident that the head-spinning pace of developments in international trade we witnessed in 2018 will not be easing-up as the new year unfolds. Here is a quick “tour of the horizon” on some key issues to keep an eye on over the next several months:

US-China

Section 232 report on automotive tariffs

In May 2018, the Trump Administration opened an investigation into whether US national security interests were being threatened by automotive imports, pursuant to Section 232 of the Trade Expansion Act of 1962. This is the same authority the Administration has used to apply global steel and aluminum tariffs, although some exemptions were subsequently granted.

The steel and aluminum tariffs sparked strong condemnation – and retaliation — from trade partners who viewed the national security argument as a contrivance designed to justify protectionism and create leverage to squeeze concessions from partners. If anything, the possibility of automotive tariffs being applied under the same national security pretense has elicited even higher levels of criticism and concern.

The long awaited Commerce Department report on automotive imports under Section 232 is due on February 19th. Early drafts of the reports indicated several options are being prepared, including automotive tariffs in the 20-25 percent range, as well as more narrowly focused action on high technology subsectors, which would be aimed at China’s Made in China 2025 program.

An affirmative ruling by Commerce on the threat to national security posed by automotive imports would clear the way for the President to apply tariffs or impose other restrictions — if he so chooses.

My take: Don’t attach too much importance to the rapidly approaching report deadline. The President still has an additional 90 days to make a decision. And the Trump Administration has demonstrated a willingness to dissemble when tactically prudent. The auto tariffs would be a major hammer to drop, and if dragging out the decision to allow discussions with trade partners to play out further (while the sword of Damocles hangs overhead) is deemed expedient, there is no reason why the White House won’t do so.

In terms of the considerations being weighed by the Administration, moving forward with the auto tariffs would cause a major rupture with key trade partners (and traditional allies) at the precise time the US is trying to bring maximize pressure to bear on China. Antagonizing the EU, Japan, and other key partners — whose support could be useful — might seem counterintuitive. Yet, the President was advised of precisely these same considerations when weighing the steel tariffs, and decided to move forward nonetheless. And there are indications that the President might view automotive tariffs as leverage to extract stronger support from the EU and Japan in confronting China.

On top of that, automotive issues seem to have a special saliency for the President. Going back more than 30 years as a private citizen, Mr. Trump has railed against automotive trade as one of the most egregious examples of how US trade partners “take advantage” of the US. By all accounts, it is a deeply held personal conviction. The President also sees automotive tariffs as a useful cudgel to pressure the EU into including agriculture in a potential US-EU trade deal, allowing talks to commence on terms more desirable for the US. For its part however, the EU has indicated that the imposition of auto tariffs will scuttle the talks entirely.

There are still a number of steps ahead before the dance on automotive tariffs is complete. But the potential implications are profound. If the final decision is in fact to move forward with global automotive tariffs, key trade partners will almost certainly respond with the imposition of commensurate retaliatory tariffs on US products. In that case, the so-called “trade war” which has thus far been largely a US-China affair would edge a bit closer to being a truly global trade war.

NAFTA complications?

Looming over all of this is the fact that President Trump continues to have the “nuclear option” at his disposal: He has threatened to terminate the existing NAFTA, leaving Congress with the stark binary choice of either approving the revised NAFTA, or unleashing the severe dislocations that would result from having no NAFTA at all.

My take: Ever since the 2018 Congressional election results rolled in, it’s been inevitable that NAFTA ratification would get caught up in the broader political chess game being played by the Democratic House of Representatives and the Republican White House, as both parties eye the 2020 Presidential election. Democrats will not want to present the President with a “victory” on NAFTA unless they can demonstrate that they’ve responded to the interests of their base. Expect Democrats to press hard for at least some “modifications” (especially on enforcement, labor and environment), although presumably every effort will be made to limit the scope of the modifications so they can be handled in implementing legislation (or other means) rather than reopening negotiations. Whether that will ultimately be possible remains to be seen. But if negotiations are reopened, a successful conclusion cannot be assumed.

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