June 3, 2019
I want to talk about long-term developments in U.S.-China economic relations, but I would be derelict if I did not say a brief word about two events late last week. Both have produced a sharp negative reaction, but only one deserved it.
First, the president submitted the draft Statement of Administrative Action (SAA) on the United States-Canada-Mexico Trade Agreement (USMCA) to Congress. Although this was ill-received by House Democrats, it is, in fact, a normal part of the process that should not preempt ongoing discussions over Democrats’ concerns about the USMCA. The SAA is not the draft bill. It identifies administrative actions the executive branch intends to take if the USMCA implementing legislation is enacted. It must be submitted 30 days before the implementing bill, so its submission is a necessary step in moving the process along. It does not mean the bill will arrive 30 days later—in the case of the Trans-Atlantic Pacific Partnership (TPP), the SAA was submitted, and the bill never arrived. The SAA is something members of Congress should welcome and not treat as a hostile act.
The president’s announcement of new tariffs on Mexico, on the other hand, is simply bizarre. Senator Grassley was the first to point out it is a misuse of the president’s authority under the International Emergency Economic Powers Act (IEEPA) (though the courts are likely to go along with it if the action is litigated). Legalisms aside, he also pointed out, correctly, that it will seriously jeopardize prospects for Congressional approval of the USMCA, not to mention what the Mexicans might ultimately do in response (although their initial reaction has been restrained). NAFTA’s great success was the integration of the three North American economies. Imposing tariffs across the board disrupts all the supply chains that have carefully constructed over 25 years. That will be particularly the case for the auto industry, which is fully integrated among all three countries and is a major component of manufactures trade. For somebody who claims to want to help the auto industry, most of what he has proposed so far will either not help or seriously hurt, and these tariffs are in the latter category.
My column last week discussed the growing prospect of land mines on the USMCA path detonating. Across-the-board tariffs on Mexico was not one of the land mines I discussed, but they are clearly in that category, and if the president actually implements them, there will be a very loud boom.
Now, on to the regularly scheduled program. As the U.S.-China soap opera continues to unfold, or unravel, depending on your point of view, it is becoming increasingly clear that the underlying objective of some in the administration is to decouple the two economies. For some of them, this is national security motivated. Huawei, for example, raises genuine concerns about compromised telecommunications products infecting our systems. For others, it is competitiveness motivated, though that is often obscured by a national security blanket. This group looks at Made in China 2025 and sees an existential economic threat—the use of massive subsidies to construct global champions in key industries, most of which are ones where the United States currently leads.
Both groups are skeptical that any trade agreement can effectively head off these challenges, so their solution is economic apartheid. The result has been signals sent to U.S. companies to pull out of China, tariffs that encourage companies to either leave China or drop them from their supply chains, or, as in the case of Huawei, outright restrictions on their activities in the United States. Not yet happening is much of an effort to do something more constructive—build alliances and rules-based trade agreements that will pressure China to behave like everybody else or suffer collective isolation.
Instead, we are, as usual, acting unilaterally in the mistaken belief that the United States alone has enough leverage to make China adopt major changes in its economy. As this approach slowly unrolls, we will begin to see its costs, largely in increased manufacturing costs and decreased competitiveness as companies attempt to develop new supply chains. That will be a time-consuming process that inevitably leads to less efficient production processes, and in cases where the Chinese are the only producers, like rare earths, significant dislocations which, while not permanent, could last for some time. Recent signs that China is taking similar decoupling actions against us will only accelerate the separation and increase the pain for both sides.
That is not to say the effort is entirely misplaced. The Chinese challenge to our economic system and to our global leadership is clear, and the fact that they are using illegal means to accomplish it is well established. Thanks are due to the Trump administration for laying out a compelling case. As with so many things in this administration, however, the gap between trenchant diagnosis and bizarre prescription is a big one. The debate has already begun to shift from problem to solution, and I imagine that at some point talk about “ripping off the Band-Aid” will replace “short-term pain, long-term gain” as a means of defending decoupling. That makes sense when you’re dealing with a paper cut, but open-heart surgery requires a good bit more caution before proceeding.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
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