Goodbye to Harley Davidson and the WTO?
July 27, 2018
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SCOTT MILLER: I’m Scott.
WILLIAM ALAN REINSCH: I’m Bill.
MR. MILLER and MR. REINSCH: (Together.) And we’re The Trade Guys.
H. ANDREW SCHWARTZ: You’re listening to The Trade Guys, a podcast produced by CSIS, where we talk about trade in terms that everyone can understand. I’m H. Andrew Schwartz. And I’m here with Scott Miller and Bill Reinsch, the CSIS Trade Guys.
In this episode, we’ll look at Harley Davidson, which announced that it would outsource some of its production to avoid EU tariffs imposed on U.S. products.
PRESIDENT DONALD TRUMP: (From recording.) Harley Davidson, please build those beautiful motorcycles in the USA, please, OK? Don’t get cute with us.
MR. SCHWARTZ: So I the president’s American first strategy good for America? Plus, will the president pull out of the World Trade Organization?
TREASURY SECRETARY STEVE MNUCHIN: (From recording.) There’s no breaking news here. I won’t use our favorite word about the –
MARIA BARTIROMO (Fox Business Network): (From recording.) Fake news?
SEC. MNUCHIN: (From recording.) Fake news. But this is an exaggeration.
MR. SCHWARTZ: Treasury Secretary Steve Mnuchin doesn’t give much credence to the report about the WTO. But are the rumors true? What would actually happen if the U.S. left the WTO? And what does all this mean for the U.S. on the global stage? We put it to The Trade Guys.
All right, so first we got to talk about Harley Davidson. What happened this week, and what’s the fallout?
MR. MILLER: Well, in brief, Harley Davidson management made rational decisions based on the incentives they were presented with, which was Europe retaliated against the United States tariffs on aluminum and steel by suspending concessions on motorcycle tariffs and raising tariffs to, I believe, 30 percent. This would have added a couple thousand dollars to the cost of a Harley Davidson in Europe. And so management decided instead of using U.S. exports to supply European markets, they would supply it from one of their other manufacturing plants – I believe either India, Brazil, or Thailand, wherever they do have manufacturing capacity out of the United States.
MR. SCHWARTZ: Yeah, so why is this such a big deal? I mean, Harley Davidson’s an American company first and foremost, always will be. Is identifying with the United States’ baseball, football, apple pie, Chevrolet. What’s the deal?
MR. MILLER: Well, because it is a – it is an American brand in the broadest sense, like Levi’s or Jack Daniels whiskey –
MR. SCHWARTZ: I love both of those things.
MR. MILLER: Me too. And but they’ve become high profile in trade disputes. Certainly Harley Davidson has its history of difficulties with competition, but they do make a product now – albeit in a declining market. But they tend to get targeted in these disputes because they are high profile. Now, interestingly – or, this situation drips with irony, because Harley Davidson was actually one of the beneficiaries of the Trans-Pacific Partnership. Asian economies have not only very high tariffs, but restrictions and taxes on high-displacement – large displacement motorcycles. Those would have been dismantled in the TPP. When the president pulled out of the TPP, Harley was faced with problems with access to the Asian market, which is a growing market. So they’re building locally.
MR. REINSCH: Yeah, we had high hopes for the Vietnam market. If you’ve been to Vietnam, motorcycles – small, large – big deal. Everybody rides them. And it’s a huge tariff.
MR. SCHWARTZ: Yeah. Bill, do you ride a motorcycle?
MR. REINSCH: I do not, no.
MR. SCHWARTZ: We got to get you on a motorcycle.
MR. REINSCH: I was on one once and not again probably.
MR. SCHWARTZ: OK. All right. All right. Fair enough.
MR. REINSCH: Sorry.
MR. MILLER: Once again, Vietnam is a great example, because the Honda 50 is the Model T of Vietnam. That’s the machine that put people on wheels. And motorbikes and motorcycles are everywhere. But very high tariffs on foreign made products, and taxes on large displacement motorcycles, which Harley only makes large displacement motorcycles. So they’re effectively excluded from the market, unless they were to have local production or get rid of the tariffs or the taxes on large displacement. It turned out TPP did both of those, and we decided we didn’t want to belong.
MR. SCHWARTZ: So why is President Trump fighting with one of our great American companies?
MR. REINSCH: Because he’s offended. He thinks he was nice to them. And he thinks they slapped him in the face. In fact, what they’ve done is exactly what Scott said – made a rational economic decision. They’re not going to sell very many motorcycles in Europe if they have to jack the price up $2,200, which is what the tariffs would have done. What baffles me about it is basically, you know, he tweeted at one point: They should stay in America. Which is kind of the antithesis of everything we talk about on this program. Telling them to stay in America is telling them to commit suicide. We’re a stable population. It’s an aging market. It’s a declining market. If they want to sell – they sell more than 90,000 vehicles now outside the United States and I think 140,000 inside the United States. So exports and foreign production are a significant part of what they do. Telling them to forget about that is absurd.
MR. MILLER: And not only is the volume large, look at the trend lines. The trend lines of the United States are declining because motorcycles are shrinking as a category in the United States, where it’s expanding outside the United States.
MR. SCHWARTZ: What do you mean they’re shrinking as a category?
MR. MILLER: It means fewer people buy motorcycles every year in the United States.
MR. REINSCH: If you look at the streets of Washington, they’re all going to electric scooters. Andrew, have you tried one of those?
MR. SCHWARTZ: I have. And they’re also –
MR. REINSCH: Did you fall off, or?
MR. SCHWARTZ: No, I’m good on that kind of thing. (Laughs.) But you know what I’ve noticed? A lot of people in D.C. are riding around without helmets – riding bikes without helmets, scooters without helmets. That’s a bad idea – really bad idea. But people in America do want to still buy Harleys. And if Harley goes out of business, Americans who want to ride Harleys are going to be pretty upset.
MR. MILLER: That’s a fact.
MR. SCHWARTZ: So why is the president trying to –
MR. REINSCH: He thinks that the Harley customers, which are – many of which are his voters, his base – and also even the Harley workers will support him. And there’s been some interviews of both of those groups.
MR. SCHWARTZ: Who have said they still support him.
MR. REINSCH: A mixed bag. Some of them say: I’m for Trump no matter what, and Harley did a bad thing, and they deserve what they get. Other people said – have said: Who is Trump to tell them now to make motorcycles? You know, they don’t tell him how to build buildings. He shouldn’t be telling them how to make motorcycles. They made a business decision and I’m fine with it. So a mixed bag. A mixed bag amongst his workers, a mixed bag amongst their customers.
MR. SCHWARTZ: Well, why did this become such a big story this week?
MR. MILLER: Look, the president is an excellent communicator. He’s a persuader. And using iconic images, iconic brands is part of the persuasion. And it was – it was a setback to him with a marquee product that hurt the message he was trying to deliver. So I think it’s about – that’s about all it is.
MR. SCHWARTZ: That’s really – that’s interesting.
MR. MILLER: Which is why, of course – why Europe chose those products.
MR. REINSCH: It was deliberate. I mean, when Scott commented on the European strategy, keep in mind too that their main plant is in Wisconsin, very near the district of the speaker of the House, if not in it.
MR. SCHWARTZ: Paul Ryan.
MR. REINSCH: Yes.
MR. MILLER: Just north of it.
MR. REINSCH: And if you look at the – we’ve talked about this in previous weeks. If you look at the retaliation lists of various countries – the Canadians, the Europeans – a lot of it is targeted to Republican districts of, you know, important members of Congress. This is an example of that. It was carefully chosen.
MR. MILLER: Kentucky bourbon’s on the list because of Senator McConnell.
MR. SCHWARTZ: So it’s strategic.
MR. MILLER: No question about it. And political.
MR. SCHWARTZ: Speaking of strategy here, there’s a lot of moving parts on steel and aluminum in general. Tell us about that.
MR. MILLER: Well, a couple – a few things happened this week that I think are starting to shape the public reaction or will start to shape it in the future. First, there was a lawsuit filed in district court challenging the constitutionality of the application of Section 232. So that one’s going to –
MR. REINSCH: It’s going to lose.
MR. MILLER: It’s probably going to lose, but at least it’s out there with some noise. Second, for the second week in a row there was an attempt to pass a bill in the Senate that Senator Corker was the sponsor of, which would have given a congressional review to any remedy for a 232 case, any national security investigation.
MR. SCHWARTZ: Wait, whoa, whoa, whoa. Time out. Time out. What’s a 232?
MR. MILLER: Section 232 of the Trade Act of 1962 provides the president with the authority to conduct an investigation on the imports effect on national security and to take action. That’s where the steel and aluminum tariffs came from. And Congress, at least in the form of Senator Corker and some of his colleagues, want to put a step in between the investigation and the remedy where Congress has a role in accepting or rejecting the remedy. That failed last week on the defense authorization bill, over Republican objections. It failed this week as an amendment to the farm bill on Democrats objection. So we have a trend of failure, but at least there’s some persistence there.
MR. SCHWARTZ: Well, I saw somebody quoted today that said Ford Fiestas are not part of national security.
MR. MILLER: Well, that’s –
MR. REINSCH: It’s a – that’s a great quote.
MR. MILLER: It’s a great soundbite. And that’s from the other Section 232 investigation that’s just public comments close today. That’s the investigation on autos and auto parts where the president has basically telegraphed the idea he’d like 20 percent tariffs on automobiles and auto parts entering the United States.
This one – that’s where that kind of came from. The global automakers said: The United States does not go to war on Ford Fiestas. (Laughter.) But interestingly –
MR. SCHWARTZ: Right. Not very intimidating, a Ford Fiesta. (Laughs.)
MR. MILLER: That’s a fact. Nice little car, but it’s a little car.
MR. REINSCH: No.
MR. SCHWARTZ: Yeah.
MR. MILLER: But what was amazing about it is all the comments – including from the Detroit three and every company doing business in America – said this is really a bad idea. It’s bad for the economy. It’s bad for the industry. It’s ultimately bad for national security. And the astonishing part of this is you look at the public comment, and here is a policy without a constituency.
MR. REINSCH: And it’s enormously – I think it’s going to be an enormous political mistake for him. That’s what fascinates me.
MR. SCHWARTZ: Why is that?
MR. REINSCH: Because it’s a consumer product. It’s a retail product. You don’t go to Walmart and buy steel. Steel is a primary product. It ends up affecting the prices of other stuff you pay, but as a consumer you don’t notice it. You buy cars. I think as Senator Hatch said, it’s the second-biggest purchase anybody will ever make –
MR. SCHWARTZ: Behind their house.
MR. REINSCH: After their house.
MR. SCHWARTZ: Right.
MR. REINSCH: The average price of a car right now in the United States is around $36,000.
MR. SCHWARTZ: That’s a lot of money.
MR. REINSCH: If – well, if this –
MR. MILLER: Add 20 percent.
MR. REINSCH: If you add 20 percent, or 25 percent depending on what he does –
MR. SCHWARTZ: It’s a lot more money.
MR. REINSCH: It’s going to go up $7,200.
MR. SCHWARTZ: That’s a lot of money.
MR. REINSCH: Even Toyota, in filing its comments on this –
MR. SCHWARTZ: And that’s not even a fancy car. That’s a – that’s a –
MR. MILLER: That’s an average.
MR. SCHWARTZ: An average.
MR. REINSCH: An average car. Toyota talked about the Camry, which is made in Kentucky. So it’s not an import but it’s got imported parts. And the Camry, which is a U.S. car made in Kentucky, that price would go up $1,800 if this happens.
MR. MILLER: Just because of the parts.
MR. REINSCH: Now, I think that consumers –
MR. SCHWARTZ: Well, it’s a good thing Jack Daniels is made in Kentucky too. You’re going to need a shot after you go buy a car that costs another $1,800.
MR. MILLER: That’s Tennessee – so the comment section doesn’t fill up – but you’re right. (Laughter.)
MR. SCHWARTZ: You’re OK. But you get what I’m saying.
MR. REINSCH: You obviously don’t know your whiskey.
MR. SCHWARTZ: Yeah. I’ve been outed. My goodness.
MR. REINSCH: That’s whiskey. Bourbon is Kentucky. Whiskey is Tennessee.
MR. SCHWARTZ: Yeah, there you go. There you go. OK. Anyway, you’re going to need a shot –
MR. MILLER: We need a Trade Guys episode on alcohol.
MR. SCHWARTZ: No matter what, you are going to need a shot of something if you got to pay 25 percent more for your car.
MR. REINSCH: Well, this is the point. I think this is something that consumers will notice.
MR. SCHWARTZ: For sure.
MR. REINSCH: And the president has indicated he really wants to do this before the election. And – which baffles me. Why anybody would want to hit consumers with a price tag like this before an election is beyond me.
MR. MILLER: And keep in mind the downstream effect on jobs, because not only – what you’ll do is contract the auto market. When you raise prices of anything, demand contracts. That’s the way – that’s why demand curves are sloped the way they are.
MR. REINSCH: People put off their car for a year.
MR. MILLER: Exactly. Now, what happens if the United States car market – which is 16 or 17 million cars a year – shrinks to 12 million because of this effect? It’s like the recession of 2008. Auto dealers went out of business. Repair shops went out of business.
MR. SCHWARTZ: A lot of jobs.
MR. MILLER: A lot of jobs got hurt in the downturn. And you’re basically manufacturing a downturn in a – in a key industry that employs people not just making automobiles, but selling them, servicing them, repairing them, insuring them. All those things get disrupted. And it’s – as Bill said, this is not something you can hide in your supply chain or force your suppliers to eat the cost.
MR. SCHWARTZ: Is there a solution that this can get worked, so this scenario doesn’t happen?
MR. MILLER: so maybe you could hope for rationality, but who knows.
MR. SCHWARTZ: But we’re not seeing – you guys are saying we’re not seeing rationality.
MR. REINSCH: Well, it begins – there’s supposed to be a rational element in the beginning. The way this provision of law works is the Commerce Department conducts a study. And they got nine months to do it. This is a case where the president wants them to hurry up. Recall, last year he said the same thing about hurrying up on steel, and they were going to finish in 60 days, and it still took them nine months. So it may not be as quick as he wants. But they have to decide if, in fact, automobiles are a threat to our national security.
MR. MILLER: Imports.
MR. REINSCH: Imports, yes. That, I think, is going to be a very difficult case for them to make.
MR. SCHWARTZ: It sounds like a very difficult case to make.
MR. REINSCH: One rational possibility is that they won’t be able to conclude that, and they’ll produce a report that says it’s not a problem, that he won’t have a basis for acting. Now, that would mean, you know, kind of defying the president, but in theory this is an independent study by analysts in the Department of Commerce whose job it is to find the truth. So we’ll see what happens.
MR. SCHWARTZ: We’ll have to watch that closely. I mean, I just can’t get past the fact that if cars are a part of national security on this, we’re going to all have to pay so much more for our cars.
MR. MILLER: Right. Well, keep in mind how we got here. I believe the use of Section 232, which was basically dormant – there hadn’t really been an important case since the 1980s using this section of law. Why did the president revive it? I think it’s because the national security designation in trade law is self-judging and he thought he had the freest hand. It’s a section of law he can use without the permission of Congress. He doesn’t need fast track. He doesn’t need consultations. He doesn’t need to negotiate objectives with the Congress.
MR. SCHWARTZ: There’s no vote.
MR. MILLER: There’s no vote. He can just act. And second, it is very difficult to challenge at the WTO or any other international forum because national security decisions are self-judging for the party making it. So I think he chose this tactically because, you know, it has a free hand. He now has a substantive problem, which is there’s no conceivable national security threat to importing automobiles. So we’ll see what he does.
MR. SCHWARTZ: This is why, people, you need to listen to The Trade Guys, because you just heard it right here, this is explaining a very complex issue in ways that we can all understand.
You mentioned the WTO. Let’s go to the WTO. It was reported this morning by Axios that President Trump has reportedly old top White House officials he wants to withdraw the United States from the WTO. And that’s a move that could throw global trade into serious disarray. This is not something that he said once. It’s apparently, according to Axios, something he said a hundred times. Now, Secretary Mnuchin, secretary of Treasury, came out right away after he said – after this was reported. He was on Fox Business. And he said, it’s fake news. What’s going on here?
MR. REINSCH: I’m sure he said it a number of times.
MR. SCHWARTZ: They said he said it over – he said it hundreds of times.
MR. REINSCH: I believe that. That’s probably a good sign.
MR. SCHWARTZ: Well, tell us – OK. Before we go any further, tell us, Trade Guys, what the WTO is. It’s 164-member body. What is it?
MR. REINSCH: I just did – a little commercial here – elsewhere on CSIS I just did a video on the Bretton Woods institutions, one of which the WTO. So watch that. And it will only take you two minutes I think.
MR. SCHWARTZ: You can find that on YouTube.
MR. REINSCH: When World War II was ending, the allies got together and said: How can we make sure that won’t happen again? Meaning the war, and the depression. And they created three – a three-legged stool, a tripod of institutions. The World Bank for development, the International Monetary Fund, the IMF, to deal with issues of balance and debit and currency, and what ultimately became – it had a different name – but what ultimately became the World Trade Organization to deal with trade. The full-blown World Trade Organization that we have now began in 1994 as a result of a trade negotiation.
It does three big things: It conducts trade negotiations to further liberalize trade, it has a dispute settlement process where countries who have a complaint about somebody else’s rules can go to the WTO and get their complaint adjudicated. There’s a tribunal system, a panel system that makes judgements. And it does a whole bunch of sort of routine committee work of helping countries develop better standards and clearer standards of safety and environment by sharing information amongst countries. So it’s got three big functions.
It’s very easy to complain about the dispute settlement process because every country loses cases. We’ve won more than we’ve lost, I think. The dirty little secret of this is most of the time the complaining party wins. And the complaining party usually wins because they don’t bring a case unless they think they have a good one. So the United States has won almost every time it’s made a complaint.
MR. MILLER: About 85 percent of the time we win. But then again, there is – Bill’s right, there’s a selection bias.
MR. SCHWARTZ: So if we in 85 percent of the time, why is this something that’s bothering President Trump?
MR. REINSCH: Well, the times we lose.
MR. MILLER: He doesn’t like to lose, because when countries bring cases against us they tend to win, we tend to lose. The selection bias is there’s enough international prestige, national prestige, and cost involved in bringing a dispute that you only bring ones you’re sure about winning. So that’s why it works out the way it did. I think it fits with his narrative of unfairness. But just in case the trade –
MR. SCHWARTZ: The WTO fits with the president’s narrative of unfairness?
MR. MILLER: Of unfairness.
MR. REINSCH: It’s unfair to us.
MR. SCHWARTZ: Unfair to the United States.
MR. REINSCH: Yes.
MR. MILLER: Right. But just in case –
MR. SCHWARTZ: That is definitely a narrative the president has.
MR. MILLER: Yes. Now, just in case one of the president’s staff or the president himself is a listener to The Trade Guys, let me give you the one reason –
MR. SCHWARTZ: They are listeners. We know this.
MR. MILLER: The one reason you should not pull out, and it’s in Article 1 of the rules of the WTO, called the GATT. Article 1 is nondiscrimination –
MR. SCHWARTZ: General Agreement on Tariffs and Trade, GATT.
MR. MILLER: Yes. But Article 1 says: You are – you have to treat all your trading partners the same. It’s called most favored nation. If the United States were to pull out, all those other members could consider us a nonmember, and treat our exports any way they felt like treating them.
MR. REINSCH: The president looks only at the other half of the equation. If we pull out, we could do anything we want to those guys, because there won’t be any rules to hem us in.
MR. MILLER: To restrict us.
MR. REINSCH: But that ignores the fact that they then can do exactly the same thing to us and get away with it, because we will not – they won’t be bound by any rules with respect to us because we’re not playing their game.
MR. SCHWARTZ: So, OK, it’s a narrative, but is he just venting? Is this just part of a narrative that – you know, is there any reality that we might withdraw from the WTO?
MR. MILLER: Well, I believe in this particular case – well, first of all, withdrawal is a confusing subject. Lawyers around town have been debating who needs to agree to a withdrawal from NAFTA for about six months now, and nobody can figure it out, OK? But with regard to withdrawing from the GATT or the WTO, that, I believe, would require an act of Congress. So this is a somewhat remote possibility.
MR. SCHWARTZ: OK. So how does Congress feel about this?
MR. MILLER: Well, Congress would likely oppose it. And keep in mind, the reason Congress would need to be involved is because they have the enumerated power to regulate commerce with foreign nations in Article 1. So this would be – require the Congress to get involved. I think they would be very unlikely to do so given the United States basically created this system. In our current – whatever the president thinks about the fairness of the current set of tariffs, we negotiated for every single one of those. We negotiated all these rules. We led this process, OK? And maybe everybody who was in the job before him was a complete bonehead –
MR. SCHWARTZ: Which is what he says.
MR. MILLER: Which is his attitude, OK. Or maybe not. But the Congress will have to adjudicate that particular claim.
MR. REINSCH: I think they’ll be appalled. I mean, looking ahead to tipping points, I mean one of – one of the debates that we’ve – and we’ve talked about this a little bit in the past. Is there a moment at which the Congress will stand up to him on trade? And right now, I’m thinking probably not, because – and I think we talked about this last week – his base is their base in the Republican Party. And he has historically high support amongst his base, amongst the Republican Party.
If there are anything – if there’s anything that will cause the Congress to stand up, I think there’s two possibilities. One is car tariffs that we just talked about, because they’re going to hear from everybody about that. But the second is pulling out of the WTO, because it’s what Scott said. We build that institution. We designed the post-war world. We spent 70 years defending it. And I don’t think the Congress is going to walk away from it easily. And it’s benefitted us.
MR. SCHWARTZ: Right, but unlike cars though, Americans – most Americans don’t know what the WTO is, I guess, right? So it’s not like they’re going to hear from their constituents, per se.
MR. MILLER: No. This is one of those areas where you’ll really miss it when it’s gone.
MR. SCHWARTZ: Explain that.
MR. MILLER: Well, this is – my basic theory about the WTO is fish have no idea they’re in water, but if you drain the tank the notice. (Laughter.)
MR. SCHWARTZ: Yeah. Well, they do, yeah. So –
MR. MILLER: So these rules – these rules that were created and nurtured over 70 years are the water, OK, for all us fish to swim in, OK? Draining that tank will have some consequences. And nobody can imagine it because we’ve never lived – we’re beyond living memory of a world where trade disputes were settled with sheer power instead of rules.
MR. SCHWARTZ: Give me an example of what a world without us in the WTO might look like.
MR. MILLER: I believe you would know this. We have a state called New York.
MR. SCHWARTZ: Yes.
MR. MILLER: Whose original name was New Amsterdam. Why did the name change?
MR. SCHWARTZ: Don’t know.
MR. MILLER: Well, the answer is it was – settled a shooting war over nutmeg between Britain and Holland in 1637 – the Treaty of Breda.
MR. SCHWARTZ: Really?
MR. MILLER: Those were trade agreements before the GATT, OK?
MR. SCHWARTZ: You learn something new every day.
MR. MILLER: People were shot, islands were being burned over nutmeg. And one of the consequences of settling the shooting, stopping – having an armistice in this trade war, which was a real war, was that Holland surrendered its claims in North America to the British. And New Amsterdam became New York.
MR. SCHWARTZ: Ah.
MR. MILLER: You know, but it’s still –
MR. SCHWARTZ: I like it better as New York.
MR. MILLER: It’s still the Tappan Zee. It’s still Brooklyn, OK? All those Dutch names prevailed.
MR. SCHWARTZ: The Tappan Zee Bridge.
MR. MILLER: All those Dutch names prevailed. They’re still in our – in our geography.
MR. SCHWARTZ: You know, when I was a kid I used to call it the chimpanzee bridge, because I just didn’t know – you know, Tappan Zee, what?
MR. MILLER: Henry Hudson, when he sailed up the Hudson River, was working for the Dutch East India Company. So this was – this was like state-owned enterprises in the old days. But that’s how trade wars used to be settled.
MR. SCHWARTZ: Fascinating. So that’s what we would have if we were not in the WTO?
MR. REINSCH: Well, I got a ticket once on the Tappan Zee Bridge. It’s not my favorite bridge.
MR. SCHWARTZ: (Laughs.) It’s a beautiful bridge, though. Beautiful scenes.
MR. REINSCH: It is a beautiful bridge, unless there’s a cop following you.
MR. SCHWARTZ: Yeah. Do cops follow you often, Bill?
MR. REINSCH: Well, no, it was –
MR. MILLER: (Laughs.) In his Mustang.
MR. REINSCH: No, it wasn’t the Mustang. Actually, it was a lesson in state politics. I was driving – this a was a long time ago. I was in college. A group of ours were going to visit one of my friend’s relatives outside of Boston. We were driving a car with North Carolina plates.
MR. MILLER: What was your second mistake? (Laughs.)
MR. REINSCH: Well – and what they do if you’re out of state is they don’t just give you a ticket. You know, they arrest you and take you to the station because then you pay cash at the moment, because they don’t want you to skip on the ticket. So I’m riding in the cop car while my friends are in the North Carolina car following me. And the guy explains. He said, you’ve got all those speed traps down in North Carolina that catch our New Yorkers all the time. I’ve been caught in a couple of them and I’m getting even. That’s what he said.
MR. SCHWARTZ: So this is a North-South thing. My goodness.
MR. REINSCH: It was frustrating. But it was also a long time ago.
MR. MILLER: Yeah.
MR. REINSCH: But let me give you a different example. If we don’t belong to the WTO, one of the things that the EU could simply say is: We’re not going to accept any more of your agriculture. We’re not going to accept any wine. We’re not going to accept any cheese. We’re not going to accept any beef.
MR. MILLER: Keep your Jack Daniels.
MR. REINSCH: Soybeans, all that stuff. And there’s nothing we could do about it, except say the same thing back to them, which is how you get into an even bigger trade war.
MR. SCHWARTZ: All right, so this is –
MR. REINSCH: Because we wouldn’t have any rights anymore.
MR. SCHWARTZ: Sounds problematic at the least.
MR. MILLER: Definitely.
MR. REINSCH: Particularly if you’re a farmer, because that’s one of the – where the rules really hold things together are in agriculture, because it’s always tempting if you’re – if you’re a farmer to try to keep the foreign products out. And there’s a lot of things you can – games you can play, like, on health and safety, and inspections. And you can argue that the foreign product is diseased, mad cow, you know, name your disease. And there’s a whole body of WTO-based rules that tell you what you can and cannot argue. If we don’t belong, we’re at the mercy of whatever these guys want to do.
MR. SCHWARTZ: All right. Let’s move on. We’ll leave the WTO. We’ll have to keep watching that. Let’s move onto China. There was a really interesting article earlier in the week in The Wall Street Journal out of Beijing, where China’s President Xi Jinping told a group of U.S. CEOs that he will strike back at the United States. This was a pretty underreported story. It was really interesting. What are you guys thinking about with China this week?
MR. REINSCH: I’m gloomy. I think we’re heading down the road toward tariffs and retaliatory tariffs. I mean, Scott was right. The investment decision was one brief shining moment of sanity.
MR. MILLER: Yeah, the bright spot in U.S.-China relations is that among the recommendations that came out of the investigation into Chinese unfair practices was that the United States would restrict investment of China in the United States.
MR. SCHWARTZ: This is the U.S. investigating China’s unfair practices.
MR. MILLER: Right. Yes.
MR. SCHWARTZ: And what happened with that?
MR. MILLER: Well, the president – many of us thought the president would invoke an economic emergency and use the statute called IEEPA, the International Economic Emergencies Powers Act, and declare that emergency and take sort of independent action to restrict Chinese investment. Instead, he looked to the Congress, which is now improving a standing organization called the Committee on Foreign Investment in the United States, or CFIUS.
MR. SCHWARTZ: CFIUS.
MR. MILLER: OK. So this – the law governing CFIUS is being amended and modernized in the Defense Authorization Act. House and Senate have both passed their versions. It needs to be reconciled in conference. But the president stated clearly that he intends to use the new law that Congress passes and the Committee on Foreign Investment in the United States to deal with the investment side of the China investigation.
MR. REINSCH: Which was the smart, rational thing to do. He was able to do it partly because he still has the tariffs. And the tariffs, which were not part of that discussion, go into effect July 6th, and would not solve any of the problems that have been identified in terms of technology theft, technology transfer, all the stuff we’ve talked about. They’re just tariffs. And the Chinese have been very clear. And as you said, Xi Jinping told a group of executives this last week, that if we do it they’ll do it back.
MR. SCHWARTZ: Well, and in fact, on Thursday the – China’s Commerce Ministry announced that China had agreed to lower or cancel existing tariffs or border taxes on thousands of goods from India, South Korea, Sri Lanka, Bangladesh, and Laos beginning on July 1st. What’s that tell you?
MR. MILLER: Yes. Well, it says that our trading partners are reacting.
MR. REINSCH: We’re warming up.
MR. MILLER: We’re warming up to the ongoing conflict. Keep in mind, July 1 st is also the date Canada’s retaliation for the steel and aluminum tariff kicks in. So happy Canada Day, everyone.
MR. SCHWARTZ: I mean, in my neighborhood, if something like that happens, they – it’s on. It’s on. That’s what it sounds like to me.
MR. MILLER: I think that’s where we are.
MR. REINSCH: Well, that’s – and the president has responded that way. I mean, most often these things just go one round. We do something, they do something, then we talk. Here, you know, we’re doing something, the Chinese have announced they’re going to do it back. We’re publishing papers to – you know the legal steps are being taken to implement that on both sides. When the president heard what the Chinese were going to do, the then said, well, we’re going to add 200 billion more – tariffs on 200 billion more. First it was 100 (billion), then he escalated that to 200 billion more items on which tariffs would be placed. I think the Chinese response will be, well, we’ll match you, you know? And then you get into this ratcheting up of, you know, one move after another, and then it’s a war.
MR. SCHWARTZ: Tit for tat. Tit for tat.
MR. REINSCH: Yes.
MR. MILLER: And people will get their $1,000 iPhones which, last week, were 299 (dollars), so.
MR. REINSCH: Not in my world – not in my world, they’re not 299 (dollars). (Laughter.) But OK.
MR. SCHWARTZ: So all this leads to what? What does the U.S. need to do?
MR. MILLER: I wish we had good answers for that, because that’s – I think Bill and I have both said this in maybe different ways, is when it comes to China the president, I believe, has the right theory of the problem. He understands the challenge that China presents to the trading system. He understands the effect that it has in the long run on the U.S. economy. And there’s a need to take action. But it is unclear to me – and maybe Bill has a better idea – it is unclear to me how any of the actions we’re taking actually get to a place where we’re dealing with the real problem.
MR. REINSCH: I think that’s right. His attitude is – you know, it’s classic Trump: Hit them in the face long enough, and then they fold. And this is a case where they won’t, really because they can’t, because what we want them to do is completely alter the way their economy is structured, eliminate a policy to create national champions in sectors where they’re determined the lead the world. And those happen to be sectors that are fundamental to their control of their population, because it affects the internet, it affects financial services, it affects access to credit, it affects enormous amounts of data, encryption. For these Chinese, these are not trade issues. They’re national security issues. They’re public control issues.
We are telling them to weaken the party’s control over the society. And they’re not going to do that. That’s why we’re gloomy. I mean, if there’s an exit ramp – I mean, what’s frustrating about this is that there is sort of an exit ramp because, you know, the United States has pursued sort of a – kind of a two-pronged strategy. Sometimes it talks about all those problems. Other times, the president just says, well, the deficit’s too high. You know, we need to sell them more stuff. There, you could cut a deal. You know, they’ll buy more gas. They’ll buy more soybeans. And they’ll buy a bunch of airplanes. They’ll do that. They’ve offered to do that. If that were enough – I mean, that would settle the war, if the president would do that. The tragedy of that is it solves none of the real problems. It just papers over them.
MR. SCHWARTZ: So, all right. Now there’s a midterm election that we all know is coming in the fall. What are people on the Hill saying about this tit for tat, all that’s going on with trade? Is it going to be an election issue in the fall? And what are they saying about it right now on the Hill, for those who are in office?
MR. MILLER: They’re worried that it might be – they see very little option for affecting the trajectory of any of this. But they also are somewhat assured that trade as an issue, with lower salience than many other issues that voters make up their mind up about candidates for.
MR. SCHWARTZ: Yeah, not if our cars are going to cost 25 percent more.
MR. REINSCH: That is the wild card.
MR. MILLER: Yeah, that – so, that is, as Bill puts it, the wild card, right.
MR. REINSCH: If he does that before the election, I think it would be a huge political mistake. As for the members, keep in mind that trade politics, I’ve always thought, is more regional than partisan. If you represent the coast, you tend to be pro-trade, because you’ve got a lot – look at California. Enormous stuff going back and forth. You tend to be pro. If you represent Ohio, Pennsylvania, Michigan, you tend to be a trade skeptic, because they’ve suffered a lot. And that’s true – it doesn’t matter in those states whether you’re Republican or Democrat. You’re going to take the – you know, Sherrod Brown is articulating a view that is not that different from Trump’s.
MR. SCHWARTZ: Sherrod Brown, Democratic senator from Ohio.
MR. REINSCH: From Ohio, who’s running for reelection. His Republican opponent is going to say the same thing on trade that he’s saying. If you look at Ohio congressional – Scott’s the Ohio expert, should be talking – but I think if you look at Ohio House races it’ll be the same thing. I think on trade you’ll find the Democrats and the Republicans saying pretty much the same thing.
MR. MILLER: Oh, that’s right. And in fact, Senator Brown is on the ballot this year, OK? His opponent is a House member, Jim Renacci who is actually a former car dealer and from northeast Ohio. I don’t think Mr. Renacci will have a much different point of view on trade than Senator Brown.
MR. SCHWARTZ: Does he have a chance against Sherrod Brown?
MR. MILLER: He’s not polling well at the moment.
MR. REINSCH: No.
MR. MILLER: So Sherrod Brown I don’t think has ever lost a race in his entire political career, which goes back to in his 20s when he was – he was the secretary of state of Ohio, I think, was his first statewide job.
MR. REINSCH: That’s right. That’s right.
MR. MILLER: But he’s a very successful politician for good reason.
MR. SCHWARTZ: Well, he listens to his constituents.
MR. MILLER: He does.
MR. REINSCH: He listens. And it comes through. I don’t agree with him on everything, but when I ran a trade association we had a very, very helpful, successful meeting with him. We took – you know, we asked him to come meet with us in Cincinnati. And he said, sure. Showed up, a business group. Took a plant tour. Had lunch with a bunch of people who couldn’t disagree with him more on trade. And they had a great back and forth. And I think that’s what you want in your elected official, someone who is honest with you and straightforward. He told them when he thought they were wrong. They told him – they told him when they he was wrong. And they both walked out of the room and they were fine.
MR. SCHWARTZ: Do you think we’re going to – so do you think on trade we’re going to get that from a wide range of our elected officials, coming now and through the fall?
MR. MILLER: A lot of them are just going to duck, to be honest. They will try to avoid the issue.
MR. REINSCH: Yeah, cut and run.
MR. MILLER: There’s enough tension on this. Imagine you represent a farm state and you’ve see the prices of soybeans decline, prices of lean hogs have declined because of action by Mexico. It’s tough times out there. You’d prefer to talk about something else.
MR. REINSCH: It’s a dilemma even on the part of the voters. I mean, talk to a farmer in Nebraska, and they’ll say: I’m really hurting. You know, and soybean prices – I’ve lost $100,000 income. But I’m still for Trump.
MR. SCHWARTZ: Yeah, it’s amazing.
MR. REINSCH: The question is, will they still be for him in November. You know, and that’s – a lot can happen between now and then. And we’ll see.
MR. SCHWARTZ: To our listeners, if you have a question for The Trade Guys, write us at TradeGuys@CSIS.org. That’s TradeGuys@CSIS.org. We’ll read some of your emails and have The Trade Guys react to them. Thank you, Trade Guys.
MR. MILLER: Thanks, Andrew.
MR. REINSCH: Thank you.
MR. SCHWARTZ: You’ve been listening to The Trade Guys, a CSIS podcast.