A turning point for US trade policy

But last week seems to have marked a significant shift—a turning point in time—after which the United States should be now included into any “risk calculus” going forward. 

Consider the following set of actions taken last week alone:

1)    The US escalated tariffs on “List 3” for US$200 billion in Chinese imports from 10% to 25%

2)    The US announced the creation of a “List 4” to include all remaining items (roughly $300 billion) imported from China to receive a potential 25% tariff

3)    The US placed Huawei on a list of companies deemed to be a national security risk, the so-called “entity list,” effectively removing it from operating in the United States or working in concert with American firms

4)    The US found that imported passenger cars constitute a national security threat to the United States

5)    The US, having determined under the latest Section 232 case on automobiles that US security is gravely at risk, provided key US allies—Europe and Japan—with up to six months to make arrangements for limits on imports (ie impose managed trade) to the United States before potential tariffs are imposed

6)    The US removed Section 232 tariffs on steel and aluminum from Canada and Mexico, which were originally instituted for national security reasons, meaning that apparently Canadian and Mexican imports are less threatening now

7)    The US continued to block efforts at the World Trade Organization (WTO) in Geneva to discuss changes to the appellate body that would allow the dispute settlement system to operate after December 2019

American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat.  At a certain point, the frog will not be able to survive, even if it were suddenly rescued.  The US, it appears, has reached this juncture.

Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast.  Instead, it was largely shrugged off as “just another week in DC.” 

The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.

This is not just rhetoric.  US President Trump came into office determined to remake the trade system.  It was the one issue that he personally cared about and has a legacy dating back decades.  He has systematically gone about staffing his administration with enough like-minded individuals to carry out his objectives. 

The changes he has wrought will remain long after he leaves office.   

Take just the decisions rendered last week.

The imposition of tariffs on Chinese goods has begun to have consequences.  The US, as Martin Wolf noted in the Financial Times, is headed for higher tariff rates than India.

While supply chains are stickier than many imagined, the longer the US-China trade war continues, the harder it is for firms to ignore the damage.  The high costs of shifting suppliers will be outweighed by the continuing costs of tariffs and the fear of increasing escalation in the future.

Once these chains shift, they do not move back again easily.  Once new sourcing patterns take hold, they will not reset. 

The assumption in Washington is that many firms will relocate production to Vietnam or anywhere else for sale back into the United States.  There is a term for such actions, “ABC” or Anywhere But China.  As long as companies start making products outside of China, such thinking goes, the US wins.

But it is likely that firms will think harder about future decisions.  The US market is a powerful draw, but it is no longer the only game in town. 

China alone has 300 million middle class consumers.  The rest of Asia is equally significant.  Firms that are thinking about revamping supply chains might just opt to shift to Asia for final markets that are largely found in Asia and beyond, making the US less relevant in the future. 

Once old patterns of behavior are broken, it is not automatic that past decisions hold.  The importance of the US consumer as king may not be as relevant.  If the US is going behave more erratically going forward, firms might think twice about how tightly they want to be connected. 

The use of national security as justification for clearly domestic protectionist behavior is especially dangerous.  The autos case demonstrates the bankruptcy of this claim.  National security arguments will not remain the preserve of just the Americans, but will spread elsewhere. 

Hence the particular danger of American erosion of the global trading system norms at precisely the moment when such values are most needed. 

If other countries start taking “national security” exceptions for garden variety protectionist decisions, the global trading system is headed for collapse. 

While Trump is likely to cheer to this development, it will come at a heavy cost.  The consequences will be felt far beyond the United States and affect more than just his own supporters. 

It may be relatively comforting to argue that last week was merely the latest “bumpy” week for trade coming out of Washington.  But a careful look at the types of decisions and the long-term damage caused by these actions shows that the United States is becoming a problem.  The global consequences will be profound.