WebPort Global sat down recently with a trade attorney for some advice on what’s going on in the world of international trade. The attorney asked for anonymity to protect his clients, not that he engaged in any rhetorical bomb throwing during our conversation.
He did introduce himself as a “mainstream Republican,” before rounding on the Trump administration for its use of national security as a justification to impose punitive tariffs on foreign steel and aluminum producers. Trump has threatened to impose similar tariffs on car exports, invoking Section 232 of the Trade Expansion Act of 1962, but the U.S. Commerce Department has delayed implementation. If progress is made, negotiating broader trade issues with the EU, for example, there may be no need for them.
The trade lawyer said not only is there no need, there’s no justification. Section 232 was created to be used sparingly and only in the face of imminent harm to U.S. national security. The grounds for doing so now are purely protectionist, will infuriate allies and may cause them to retaliate in a harmful tit-for-tat race to the bottom.
His advice and hope: End these tariffs and don’t use section 232 anymore to try to wring concessions out of trading partners.
His views on the U.S.-China trade spat are somewhat outside what’s available in the business media. He believes that the administration is wrong to insist that there should be a balance in trade balances. Trump points to China’s huge trade surplus with the U.S. as evidence that U.S. businesses and workers are getting taken to the cleaners. The lawyer said that this measure is flawed because it fails to take into account that the U.S. has matured into a service-based economy, while China has focused on manufacturing during this phase of its development from Mao suits and bicycles 40 years ago to today’s “factory to the world.” We have a deficit because the U.S. is rich and is good at producing other things of value.
The Chinese can promise to buy more stuff, which they already had before negotiations broke down, but this is a temporary fix as does it nothing to fix the structural reasons for the imbalance. Plus, a lot of the imports represented by the deficit are intermediate goods used by U.S. manufacturers and in many cases produced by China-U.S. joint ventures.
Firing up the mills again
He scoffs at photo op events such as the one where the Secretary of Commerce recently visited a formerly shuttered steel mill that was brought back to life by the tariffs. He said that this and other heavy industries will not create the promised jobs because they will operate mainly via automation. Many more jobs will be lost via a trade war than will be created by one.
His advice and hope: Abandon the U.S.-China trade deficit as evidence of wrongful behavior of China. Or explain to the American public what these numbers really mean and what they don’t include.
On the issue of market access, the lawyer concedes that protectionism is rife and that China’s centrally planned economy has made it easier to keep foreigners at bay. This despite China’s membership in the WTO, which did not anticipate the membership of a disruptive behemoth. Some rules need to be changed, and the U.S. should be working with its allies on new rules that deal with government-owned enterprises, treatment of foreign investment and intellectual property.
On IP, the lawyer argued that the Chinese are getting better, though from a low baseline, both because of external pressure and internal. The China private sector is growing and needs its own IP protection. If it doesn’t get it, companies will transfer to Singapore, the U.S. and other places that have strong laws and enforcement.
He referred to the case of the China telecommunications firm ZTE, that is partly government owned, as an example of how things are changing. ZTE was caught selling goods it bought from U.S. suppliers to buyers in Iran and North Korea, violating U.S. export laws. The U.S. government fined the company $1 billion and insisted that employees involved in the illegal sales be fired. Some were, but some top executives were spared. The U.S. then banned ZTE from purchasing U.S. products, which would put it out of business. The Chinese president asked Trump to spare the company, which he did, but not before more fines were extracted and ZTE agreed to host a team of U.S. inspectors to monitor its compliance.
This result took place without punitive tariffs or threats of an all-out trade war. It’s a precedent for how such transgressions should be handled in the future.
Advice and hope: Focus on continued market opening and on preventing IP theft and violation of trade laws. Improve enforcement, an investment that pays dividends as we saw with the ZTE case. Pick objectives carefully and don’t choose too many. Focus on them intensely and use punitive tariffs only as a last resort. The Chinese and other trade partners know now that the U.S. is capable of being tough. The question is can the U.S. also be smart.
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