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US: 10 questions on trade
1. What is on Trump’s agenda regarding trade policy? President-elect Trump has outlined a seven-point trade plan on his website1 : 1) Withdraw from the Trans-Pacific Partnership; 2) Appoint tough and smart trade negotiators; 3) Direct the Secretary of Commerce to identify trade agreement violations and direct the appropriate agencies to use every tool under American and international law to end these abuses; 4) Tell NAFTA partners that the US intends to immediately renegotiate the terms of agreement; 5) Instruct the Treasury Secretary to label China a currency manipulator; 6) Instruct the US Trade Representative to bring trade cases against China, both in the US and the WTO; 7) Use every lawful presidential power to remedy trade disputes if China does not cease its activities, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.
2. Why is trade an important issue for Trump? The Trump team sees trade as a key avenue to bring jobs (particularly manufacturing) back to the US and to promote more domestic growth.
3. How is the Trump administration likely to carry out this agenda? We think it is likely that the Trump team’s strategy is to pressure trading partners by taking headline-grabbing actions like reopening NAFTA or starting currency manipulator negotiations, then asking for certain concessions. The Commerce Department, which is set to be led by Wilbur Ross, who has shared Trump’s views toward trade, will likely become more aggressive in trade cases (for example with dumping and countervailing duty cases).
4. What powers does the president have in regard to trade? The president has constitutional and statutory powers to withdraw the country from free trade agreements and impose tariffs and/or import quotas, although his ability to do so in practice is legally debatable. The president could cite specific delegation of congressional authority to pull out of a trade deal. Conversely, Congress could cite that trade agreements are enacted as statutes, so they can only be reversed by another statute. The president seems likely to exercise some degree of executive power in the short term.
5. How many free trade agreements does the US currently have? The US has bilateral and multilateral free trade agreements with 20 countries. In addition, the US has completed negotiations of the Trans-Pacific Partnership (TPP) Agreement (a regional, Asia-Pacific trade agreement), and is in negotiations for an agreement with the European Union for a Transatlantic Trade and Investment Partnership (T-TIP).
6. What is the process for exiting or re-negotiating free trade agreements? To exit a free trade agreement, the president must first give a 180-day notice of withdrawal. If a new agreement were reached during this time, it would have to be ratified by Congress and the counterparty’s national legislature. If no agreement were reached by the end of the 180-day period, the agreement would expire, and tariffs would snap back to previously negotiated levels under the regular most-favoured-nation (MFN) provisions of the countries’ respective trade laws. 2 It is likely that the Trump administration would use this 180-day period following notice of withdrawal to negotiate and try to extract concessions, and if successful, declare victory and move on. On the other hand, the Trump administration could seek to simply renegotiate trade deals without giving notice to exit – no time limits would apply in this case. (See Question 4 for more details on the powers of the president.) 6. Can the president raise tariffs? At a minimum, it seems the president possesses the authority to impose tariffs on specific products in response to claims filed successfully by industry on a case-by-case basis, at least temporarily. The president could pursue this authority by drawing upon one or more of four statutes3 ; President-elect Trump has cited three of these in his trade plan. Paul Mortimer-Lee, Bricklin Dwyer, Laura Rosner, Andrew Schneider 01 December 2016 Macro Matters www.GlobalMarkets.bnpparibas.com
7. What is involved in labeling China a currency manipulator? Labelling a country a currency manipulator is mainly just that – a label. Two statutes – the 1988 Omnibus Trade and Competitiveness Act and the 2015 Trade Facilitation and Trade Enforcement Act – give the Treasury authority to label a country a currency manipulator on the basis of specific criteria. 4 If a country were to be named a currency manipulator then the Administration would simply be required to investigate the claim. Labelling a country a currency manipulator is seen as a way to pressure trade partners to renegotiate trade deals. Declaring China a currency manipulator could have unintended consequences since the Chinese economy has slowed in recent years and faces a number of challenges; if Chinese authorities were to allow the yuan to float freely, it would likely depreciate considerably against the dollar and the US trade deficit with China could widen.
8. Has the Treasury Secretary labelled countries as currency manipulators before? The Treasury has labelled three countries as currency manipulators in the past: South Korea in 1988, Taiwan in 1988 and 1992, and China from 1992 until 1994. The Government Accountability Office said that each country made “substantial reforms” in their foreign exchange regimes. However, only South Korea and Taiwan saw their bilateral trade balances with the US decline. After the US designated South Korea and Taiwan as manipulators in October 1988, both countries implemented new exchange rate systems, and both countries’ bilateral surpluses began declining about a year later (by 1990). The designation had little effect on the US trade balance with China, however.
9. What is a “trade war” and what are the historical precedents? A trade war is a situation in which two countries implement or raise tariffs or quotas on each other’s imports. Perhaps the most notable is the enactment of the Smoot-Hawley Tariff during the Great Depression, which raised taxes on imports by about 20%. Trading partners quickly retaliated, raising their own tariffs on American goods. From 1929 to 1934, world trade declined by about 66%.
10. What are some of the ways China could retaliate? China has an array of actions at its disposal that could be difficult to challenge in the WTO. It could bar state-owned enterprises from doing business with US firms; it could block key components to supply chains; it could terminate its purchases of particular US products (such as, aircraft or soybeans); it could terminate its purchases of US government bonds or dump them; or, it could renege on or slow implementation of existing agreements on intellectual property. Recent experience highlights potential retaliation. In 2009, President Obama placed a 35% tariff on Chinese tires. In response, China imposed tariffs ranging from 50.3% to 105.4% on American poultry imports, which reduced US poultry exports by USD 1bn over the next year – a 90% fall.
