Chinese and United Stases cargo containers reflecting trade war and restrictions in export and import

Making Sense of US Trade Policy

As U.S. President Donald Trump approaches the midpoint of his presidency, he will take his controversial trade policy into more extreme territory. China is already bracing for more U.S. economic pressure as trade talks between the two giants stall. Beijing will still keep the door to dialogue open, sticking to its offer to buy more U.S. goods and to liberalize select sectors, but it will not cave to U.S. demands for deeper structural reform. That means more tariffs ahead.

Indeed, the White House is already following through with a threat to impose tariffs on $200 billion worth of Chinese goods (at a rate of 10 percent for now, to be raised to 25 percent Jan. 1, 2019, once midterm elections are behind the administration.) Beijing is responding with $60 billion in tariffs of its own, but will also resort to more indirect retaliatory measures, as well, including passing prohibitive regulations on U.S. goods and companies. Frustrated that a stronger dollar and weaker yuan are blunting the tariffs — and that the strategy overall has yet to compel China into a deal on Washington’s terms — the White House will step up its threat to cover all Chinese goods. (Mindful of consumer impact, however, the White House will probably wait until after the midterms and deploy the threat toward the end of the year, when it’s likely to hit another impasse in negotiations with Beijing.)

The United States’ risk of a trade war is highest with China for two reasons. First, the trade assaults — as well as the investment reviews and export control discussions that Congress will debate this quarter — fit into the White House’s broader strategy to weaken an emerging great power adversary. Second, Washington has considerable latitude to use investigations of trade abuses under Section 301 of the Trade Act of 1974, a particularly powerful legal tool, to hammer Beijing with multiple rounds of tariffs. And, it has bipartisan support to do so.

But outside China, the White House’s hard-line devotion to reducing its global trade deficit by slapping tariffs on its trade partners, and threatening indefinite rounds of retaliation, will run into more serious constraints. The White House’s threat to apply tariffs up to 25 percent on finished vehicles and automotive parts for national security reasons under another investigation under Section 232 of the Trade Expansion Act of 1962 will take the spotlight this fiscal quarter, putting Mexico, Canada, Germany, Japan and South Korea on edge — and for good reason.

Relative to the U.S. tariffs on steel and aluminum imports, which the Trump administration also justified on national security grounds, the prospective auto tariffs would have a much greater impact, affecting more than $200 billion in imports. The Center for Automotive Research estimates that they would put at least 750,000 jobs at risk and cost the United States as much as $42.2 billion in lost gross domestic product — and that’s without considering the fallout of likely retaliation.

Given the economic hit the United States will take from expanding tariffs on China, the White House will probably have to dial back (though not entirely rescind) its threats of auto tariffs this quarter. The U.S. Commerce Department may, to that end, recommend lowering the auto tariffs or excluding auto parts from them when it issues its review on whether auto imports constitute a national security threat. The prospect of auto tariffs could also motivate Congress to check the president’s authority on Section 232 cases and give the secretary of defense more authority over trade-related matters of national security.

Mexico and Canada will have the best chance of mitigating the auto tariff threat through their renegotiation of NAFTA. South Korea and Japan will try to leverage their security ties and ongoing trade talks with the White House to do the same. But the European Union’s offer of a limited trade deal that excluded agriculture simply will not fly with the Trump administration’s unyielding and narrow ambition to reduce its trade deficit. For Germany, in particular, that means rougher trade waters ahead in navigating an already contentious relationship with Washington.

Watch this video for a sneak peek of Reva Goujon’s keynote presentation at CRE.Converge 2018. Read her Bisnow interview, “Trade Tariffs Fuel Competition Between The U.S. And China For Global Dominance,” and Market Share blog post, “AI and the Return of Great Power Competition.”

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