Trade War Hitting A Fever Pitch
June 22, 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 –
RICHARD QUEST (CNN International): (From recording.) The spat between the U.S. and its key trading partners around the world is already taking a real toll in a meaningful way.
MR. SCHWARTZ: – The Trade Guys put President Trump’s claim that trade wars are good and easy to win to the test.
REPORTER: (From recordings.) Germany’s largest automakers are scrapping the EU-U.S. import taxes.
MR. SCHWARTZ: We also look at how the tit-for-tat tariff offensive is affecting trading partners, and whether the president is leading on free trade, as White House National Trade Council Director Peter Navarro said.
PETER NAVARRO: (From recording.) Instead of Germany selling us three cars for every one we sell them it’ll be more fair. Detroit will boom. And that’s good for America. That is President Donald J. Trump leading the world in free trade.
MR. SCHWARTZ: Plus, we look at how these trade tensions are affecting the booming U.S. economy.
REPORTER: (From recording.) The Dow lost 103 yesterday. All of this, of course, is on the fears of a potential trade war.
TED GUETTERMAN (farmer): (From recording.) I see what Donald Trump is trying to do. He’s trying to get a fair playing field. But China – the first thing they’re going to throw a tariff on is our grain.
MR. SCHWARTZ: So, are the administration’s trade wars helping or hurting Americans? Is the trade war good for global trade? We put it to The Trade Guys.
Here with The Trade Guys, President Trump believes that, quote, “Trade wars are good and easy to win.” Well, this is up on Capitol Hill now. Wilbur Ross was up there yesterday, and he caught some flak. Markets are dropping. There’s a trade war going on with China, to be sure. What’s your take, Trade Guy Bill?
MR. REINSCH: Well, first they’re not easy to win, which is what we’re finding out. Other countries have resources. Other countries have things they can do that will make us uncomfortable. That’s what we heard on the Hill yesterday. The farmers are complaining. Downstream producers are complaining because suddenly their steel and their aluminum is more expensive. And they’re concerned about the stuff they import from China is becoming more expensive. So complaints are piling up. Other countries have resources that they can do. And I think the net result of trade wars is usually lose-lose. Everybody loses.
MR. SCHWARTZ: So, Wilbur Ross is up there yesterday testifying before the Senate Finance Committee. And members of the Senate Finance Committee on the Republican side, one by one – Charles Grassley talking about – he said, we watched the soybean market start to collapse because of the trade war concern. Rob Portman of Ohio warned about steel and auto producers in Ohio that are hit harder than any other state by the Canadian retaliatory tariffs. Senator Patrick Toomey from Pennsylvania cautioned that the Kraft Heinz may move its ketchup production to Canada. Ketchup in Canada. I can’t take it. What are we going to do?
MR. REINSCH: Well, I’m – it’s hard for me to comment. I worked for John Heinz for 14 years in the Senate.
MR. SCHWARTZ: I know. Bless his memory.
MR. REINSCH: And one of the things that – and ketchup was a big deal.
MR. SCHWARTZ: Ketchup’s a big deal to me.
MR. REINSCH: It was a big deal in his campaign. Yeah, one of the great quotes from his first campaign was the guy he was running against. He was a congressman from Pittsburgh. The guy he was running against was a congressman from Philadelphia, was at some diner, you know, in the middle of the state at one point, lamenting the fact that he was losing. And he picks up the bottle of ketchup on the table and says: How can I compete with this?
MR. SCHWARTZ: Right.
MR. REINSCH: But one of the things we did not do ever was do anything on behalf of the ketchup industry. But it’s a big deal. And it’s a huge issue. And as Senator Toomey explained, the way to get around – there’s always the other – trade – tariffs and retaliation like this, it’s like pushing on a balloon. You know, you push in here, it comes out somewhere else. There’s always something the companies can do. In this case, what Kraft Heinz can do, they can push the ketchup plant in Canada. Then you don’t have a retaliation problem.
MR. MILLER: Yeah, look, the tariffs chosen in – as a suspension of concession by our trading partner after we applied the tariffs. So Canadian tariffs, Mexican tariffs, soon to be Chinese tariffs will be very political in nature. China’s action on soybeans and corn, pretty obviously about the – about the Midwest, where President Trump picked up a lot of votes in 2016 and where there’s hope for pick up Senate seats in 2018. The ketchup tariffs and, in the case of some Ohio products, strawberry jam and peanut butter both products of the J.M. Smucker Company in Orrville, Ohio, are on the list because they happen to be represented by a majority member of the Ways and Means Committee, Jim Renacci. So the Canadians were very selected and Bill’s right that people have options. Companies will adjust because they’re global in their orientation.
Now, it’s starting to hit in unusual ways. Today Daimler, which is the parent company for Mercedes Benz and a very important German global company but headquartered in Germany, announced an expected lower earnings in the next quarter because of truck exports from the U.S. to China. Mercedes Benz makes trucks in Alabama. And because of Chines tariffs in response on American vehicles, they’re expecting a decline in the next quarter in their earnings.
MR. SCHWARTZ: Is that going to hurt the autoworkers in the assembly plants in Alabama?
MR. MILLER: Of course it will. It reduces their schedule. So ultimately it will – it will play through to lower unemployment, to the extent they’re persistent.
MR. SCHWARTZ: So there’s some real bipartisan – discomfort’s not even the word for it – there’s some bipartisan anger out there about –
MR. MILLER: Well, certainly skepticism about what’s going on and about the wisdom of this whole thing. And that was clear from the committee yesterday. Now, keep in mind, the commerce secretary is not a usual witness at the Senate Finance Committee. The commerce – there is a Commerce Committee in the Senate which confirmed Secretary Ross in the first place and has many areas of jurisdiction for the Commerce Department. So this was – he was a little bit of a fish out of water with the Senate Finance Committee. But because of his role in the Section 232 tariffs, he was the key witness.
MR. REINSCH: Congress is kind of an early warning system for these things. If you’re unhappy and you’re in business, one of the first things you do is you call your congressman and complain. That’s natural. You don’t – I mean, you might send the White House or you might call up the White House, but, I mean, nobody really thinks the White House is – any White House, not just this one – is going to, you know, answer the telephone when you call up, and you’re going to get to talk to the president and tell him how terrible a thing it is. If you’re a businessman, particularly if you’re an automobile dealer, which are prominent in virtually every congressional district in the country, you know, if you call your congressional office, people will pay attention to you.
MR. SCHWARTZ: All three of us have spent a lot of time on the Hill, you know, and working there. And when your constituents call, it matters.
MR. REINSCH: Yes.
MR. MILLER: Oh, and particularly the House, where you face the voters every two years.
MR. REINSCH: Because they’re your voters.
MR. MILLER: The House is exquisitely sensitive to constituent input. And they pay close attention to it. It really does matter. Bill’s right, that’s the first sign. Before anything shows up in numbers or in forecasts, it shows up in the congressman’s office.
MR. REINSCH: And the other thing to keep in mind is the market doesn’t wait – and Daimler’s a good example of it and what you just said about the market – the stock market. The market doesn’t wait for things to actually happen. You know, people make a living in all this area by anticipating. People in Daimler are – their job is to figure out what’s going to happen next and prepare. So, you know –
MR. SCHWARTZ: And they’re paying attention to the smart people who follow the market. For instance, this morning Sevens Report said that “Futures are modestly lower on trade concerns as tangible impacts of the U.S.-China trade conflict begin to emerge.” They went on to say, “Looking forward to today, will be the focus for markets and any negative trade headlines will hit stocks.”
MR. REINSCH: Exactly.
MR. SCHWARTZ: I mean, there you have it.
MR. REINSCH: People are anticipating.
MR. MILLER: Right. So the Trump economy rolls along, but we’re all watching: When does the Trump trade agenda start to disrupt the Trump economy?
MR. SCHWARTZ: Because the economy is roaring.
MR. MILLER: Yes, for the moment.
MR. SCHWARTZ: I mean, no one can say the economy is not good right now.
MR. REINSCH: Well, I can, up to a point.
MR. SCHWARTZ: OK.
MR. REINSCH: I had a discussion last night with a delegation who was here from Norway. And that question came up. One of the questions was: Your economy is great. You know, so why are people unhappy? And it depends on what numbers you look at. The unemployment rate is very low, record low. The growth rate is high – not record high, but higher than it has been. And the trajectory is right. We still, though, have a wage problem. You know, it – last year –
MR. SCHWARTZ: We have a wage problem in the U.S.
MR. REINSCH: In the United States, yes, and an inequality problem. Last year, 2017, median household income reached the same level it was in 1999. So for 18 years, median household income has gone down, and has slowly gone back up. We are now where we were 18 years ago. People are not happy about that. If you look at monthly wage – every time they – every month they come out with unemployment data which shows continually a decline in unemployment.
MR. SCHWARTZ: We’re adding jobs every month.
MR. REINSCH: We’re adding jobs every month. They also put out a little wage increase number. You know, the percentage wages have been going up. Last month I think they want down.
MR. SCHWARTZ: See, that’s a number that’s not as closely followed.
MR. REINSCH: No. People don’t pay attention. But it makes a big difference at home. You know, if a worker’s a got a job, but if he’s not making more money at the time when everybody’s telling him the economy is booming, he’s saying: Why aren’t I getting a raise? Where’s my bonus?
MR. SCHWARTZ: And this is why the Senators are – on both sides of the aisle – are nervous. Rob Portman of Ohio, who is a trade guy – former USTR – is worried about the auto industry and other industries in Ohio. Ketchup in Pennsylvania, soybeans in Iowa.
MR. MILLER: Well, look, higher material costs for the downstream users of steel put pressure on their margins and make it less likely that they tread the – that any increased business translates to higher wages for workers. So this is a problem. And ultimately, higher commodity prices will squeeze – aluminum and steel in this case – will squeeze the producers.
MR. SCHWARTZ: Can you explain that – can you explain that a little bit more, because that’s a really important point, I think.
MR. MILLER: Interestingly, yesterday almost every senator had an opening statement which had a constituent steel consumer as the model that they used for their criticism of Secretary Ross. So what you have is steel and aluminum are the primary sector. Downstream, there are about 20 workers in the steel consuming industries for every one in the steel industry. So steel consuming manufacturing is a much larger industry and employs many more people. But since steel prices are up about 30 percent since before the tariffs were put in place, or before they were contemplated, those – every steel user is being squeezed. They only have so much flexibility in terms of price increases to their customers. And so you have pressure on margins – meaning even if your business is growing, you are less likely to be able to pay for higher wages.
MR. SCHWARTZ: So this is why Johnny Isakson, senator from Georgia, put in a plea over Coca-Cola’s rising aluminum can costs.
MR. MILLER: Correct.
MR. REINSCH: This was – yes. Secretary Ross got dinged yesterday because of his video where he held up a soup can and said – you know, it could have been a can of Coke – but, you know, this is going to go up two or three cents. He had a sort of a who-cares attitudes.
MR. MILLER: No big deal. The fact is, tinplate, which is used in steel cans, like soup cans, is actually – a lot of it’s imported because the United States steel industry produces extraordinarily poor-quality tinplate. Many canners reject about one in three lots of American tinplate because it’s lower quality than what’s available in the imported market. Now the imported tinplate is a lot more expensive.
MR. SCHWARTZ: This may, and will in the short term, at least, affect the stock market. Probably in the long term, according to what the Sevens Report and others are saying about Wall Street. It could affect wages. How does it affect consumers – ordinary consumers?
MR. REINSCH: It makes their products more expensive. And I mean, Secretary Ross is – at one level, he’s right. You know, if the price of an aluminum can or a tinplate can goes up a couple cents, people may not notice. But, you know, the next – the next shoe to drop is going to be auto tariffs. The president has made pretty clear that he wants to impose auto tariffs – 25 percent auto tariffs. Well, you know –
MR. MILLER: That’s $6,000 a car.
MR. REINSCH: Yeah. That’s $6,000 a car. Consumers are going to notice that.
MR. REINSCH: That’s a pretty significant for just about anybody.
MR. MILLER: Yeah. And before we get there, keep in mind we have now an announcement of a second round of tariffs on China. The first round was targeted primarily to intermediate goods, which are –
MR. SCHWARTZ: What are intermediate goods?
MR. MILLER: Intermediate goods are materials –
MR. REINSCH: Parts and components.
MR. MILLER: – equipment, parts, components that go into further processing here.
MR. SCHWARTZ: So it’s content.
MR. MILLER: About half of what we import as a country are intermediates. They’re for further manufacturing. But the second round of tariffs will almost necessarily cover finished goods, consumer goods. And this would be apparel, footwear, electronics, television sets, mobile phones –
MR. REINSCH: Laptops.
MR. MILLER: Laptops.
MR. REINSCH: iPhones.
MR. MILLER: The top 10 components – consumer imports from China are those kind of products. People are going to see that.
MR. SCHWARTZ: OK. So I have to ask you guys, what’s the upside to this? What’s the administration’s strategy? And why do they see a big upside in this?
MR. MILLER: It’s not revealed yet. There are some signs that additional pressure is provoking openings here and there. Let me give you an example. There was a lot of controversy at the G-7 meeting, a lot of – a lot of grumpiness coming out of the G-7 meetings. One of the final tweets from the president before he went to Singapore was: What I really want is completely free trade, no tariffs, no quotas. That’s the dream. All right, well, it turns out this week the German automotive industry is proposing, through the U.S. ambassador to Germany, a beginning of negotiations for zero tariffs in automobiles. Now, ultimately –
MR. SCHWARTZ: So that means they would be able to buy American cars without tax, and we would be able to buy German cars without tax.
MR. MILLER: Yes. Now, two things happen. First, it’s completely usual to use pressure to try to force a negotiation. It’s not clear how this – the Trump administration is creating pressure. It’s not clear totally how the rest of the negotiations go. But this would be an illustration of that. The second is, it’s quite common in globalized industries for producers all over the world to realize that if we’re a global business tariffs are just an interference with our business model. And so in the Uruguay Round, back in the – back 25 years ago, chemicals and –
MR. SCHWARTZ: The Uruguay Round was the international negotiation of the General Agreement on Trade and Tariffs – Tariffs and Trade.
MR. MILLER: The last round of – correct. It concluded in 1994. But there were a number of sectoral zero-for-zero negotiations. So construction equipment. Steel, believe it or not. We have zero MFN tariff – the MFN tariff on steel is zero, all right?
MR. SCHWARTZ: Our most favored nation tariff on steel right now is zero.
MR. MILLER: For the U.S. and most of the producers in the world.
MR. SCHWARTZ: So a most favored nation would be Germany, Japan?
MR. MILLER: Right. Exactly right. So that’s all zero tariff because of those sectoral negotiations. Proposing one on autos makes total sense. Now, they’re very different starting points. Japan already has zero tariff on automobiles. The United states has 2 ½ percent, but 25 percent on trucks. Europe has 10 percent tariffs. So we have different starting points. But this is a very logical outcome, and one that a globalized industry will find many benefits from, much as the chemical industry did during the Uruguay Round.
MR. SCHWARTZ: So there’s a difference between how we’re dealing with trade with China and how we’re dealing with trade with Europe or Canada. So let’s take Europe for a second. Scott, you just said that we’re trying to force some leverage to get to –
MR. MILLER: Well, it appears the start of it. We don’t know that this is the whole thing, but at least a start.
MR. SCHWARTZ: So why are – Bill, why are the Germans caving? Does it seem like they’re caving? Or what’s the –
MR. REINSCH: Well, first of all, they’re not caving. Their offers are almost always self-serving, and this is a good example. They’re happy to drop the car tariff. But they’ve hidden in their offer is the further statement is we have to drop the truck tariff.
MR. SCHWARTZ: OK.
MR. REINSCH: And so the truck tariff is 25 percent, which is a legacy of a war we had with Germany 50 years ago over chickens. It shows you how trade issues linger. The Germans, and I think the French, in the Kennedy administration decided to ban the import of American chickens – ostensibly on health grounds, but basically because they wanted to protect their chicken farmers. We tried to negotiate, failed. And the United States retaliated. This was a long time ago. And our retaliation was a tariff on trucks, and cognac and a couple other things. And it was exactly what Scott just talked about the Canadians doing. It was calibrated to try to maximize the pain to the other side.
So in – in the ’60s, we were thinking Volkswagen and Mercedes. We put a tariff on trucks of 25 percent. And this was a classic trade battle that went one round. You know, they blocked the chickens. We blocked the trucks. And that’s that.
MR. MILLER: And that’s the situation today.
MR. REINSCH: Today. Fifty years later, we still are not getting our chickens in there and they’re still not getting our trucks in here. In the meantime, the world’s changed. This does – has a much bigger impact on Japan and Korea than it has on Volkswagen and Mercedes. But it’s still in place. The Germans who make trucks would be very happy to get rid of it. So their offer says, well, we’ll go zero for zero on cars, but we also want zero for zero on trucks, which would be a huge American concession. Not necessarily a bad one, but a big one.
MR. MILLER: Right, but a big concession. But it underscores the notion that these are global companies who produce for a global market. Look, Ford Motor Company has had a plant in the United Kingdom since about 1930. You know, U.S. firms manufacturing in Europe is nothing new. Likewise, European firms manufacturing here is absolutely nothing new – as the example of Mercedes trucks made in Alabama.
MR. SCHWARTZ: Right. In Virginia we’ve got Audi.
MR. MILLER: Sure. This has happened. These are global companies who have a global distribution. Keep in mind, the European auto market – autos and trucks – is about 16 million cars a year. North America is about 20 million cars a year. So of course, companies produce both places. Likewise, China is 28 million cars a year, and growing, so everybody produces in China as well.
MR. REINSCH: And Volvo just – which is a Chinese company, believe it or not – just opened a plant in South Carolina to make Volvos here, which will get them around any tariffs that we impose. This has been a – in fairness, they’ve been planning this for several years. It’s not a response to the tariffs. But it’s convenient.
MR. SCHWARTZ: So Ross – Wilbur Ross says that Germany has the right approach to resolving this trade disagreement among friends.
MR. REINSCH: Well, nobody asked him about the truck tariff. But the president is right, if we could get to zero-zero on everything, fine. But I’m not sure the United States is any more prepared to give up some of its things as the others are.
MR. MILLER: Right, because the president is happy to point out the speck in other countries’ eyes, like Canadian dairy, but he never reminds Americans that we have a 25 percent tariff on trucks. We have a totally controlled market on sugar that makes sugar twice the cost here that it does anywhere else in the world. So we don’t – the president never talks about our own flaws, which will be subject to negotiation. So this is – this is the start of something. We’ll have to see where it ends.
MR. SCHWARTZ: So we don’t – as you said before, Scott, we don’t know quite what the strategy of the administration has, other than, you know, bits and pieces. The other day Peter Navarro had a conference call with reporters where he said – you know, slammed China. He said, you know, China – we can’t allow China to continue stealing our intellectual property. What do Americans need to know? You’ve got some bipartisan anger on the Hill. You’ve got an administration that hasn’t fully explained its strategy – I suppose for strategic reasons. What do Americans need to know? And I’m going to put it to you, Scott, first, and then, Bill, I’d like your reaction.
MR. MILLER: Well, I do think that tensions with China – in this case the administration has the right theory of the problem. I also think –
MR. SCHWARTZ: What’s the right theory?
MR. MILLER: The theory is, China has a mercantilist strategy to take the commanding heights in key future industries, as described very explicitly in China – Made in China 2025. And this represents a threat to the United States mostly because of the way they are implementing that, which is through forced technology transfers or outright theft of intellectual property and technology. So I think that is – that is a problem that is important and one that we need to address to – for our own economic future. So that part of the – that part of the problem I think the administration’s right about.
I think Peter Navarro’s statements this week and the report released by his White House office –
MR. SCHWARTZ: What was that report?
MR. MILLER: That report was basically a detailed – it was 32 pages of complaints about how China operations on this very specific issue of the future – the future of technology. So it was quite detailed. For me, I saw that as the predicate for some announcements to come on investment restrictions on China. We’ll see how it plays out.
But what none of us really quite understand, and I’m not sure I could give the American people a good reason for, is why we’re annoying our allies to the extent that we are, while trying to focus on this problem with China.
MR. SCHWARTZ: We’re annoying our allies, and we’re also annoying both sides of the aisle here.
MR. MILLER: Definitely.
MR. REINSCH: That’s one of the problems. I think my sense of their strategy is that it’s very simple, and it’s a classic Trump strategy that you’ve seen him operate on throughout his life, which is, you know, hit the other guy in the face until he folds. You know, beat China over the head with ever-escalating threats, ever-increasing threats. And ultimately, I think the actual implementation of some of these tariffs, and the assumption being – for him it’s about leverage. The assumption is at some point we can keep doing that, because there’s more of their trade that we could cut off than our trade that they could cut off. So in the end, we will because we could hurt them more. I think that’s a miscalculation, but I think that’s the strategy.
The – and this is getting back to your question – but, I mean, the irony of that is that most people who’ve dealt with China over the years would tell you that the best way to get something with the Chinese is to form a coalition. And you don’t deal with them yourself. You get everybody – in our case, the Europeans, the Canadians, Japanese, the Koreans – all ganging up on them, because the Chinese don’t like to be outliers. They want to be part of the international community. And when everybody says, you’re cheating, it makes a difference. We’ve done this before. The Obama administration did that a couple times, and had some – I mean, it’s not perfect – but it had some success with it.
MR. SCHWARTZ: Well, we’re doing it on the South China Sea. We’re doing it on intellectual property. We’re doing it on human rights.
MR. REINSCH: But we’re alienating all the people – I mean, you just said. You know, we’re beating our friends over the head. We’re alienating all the people that we need to build a coalition. At the same time, we’re trying to go it alone. And I just don’t think with China that’s a winning strategy.
MR. SCHWARTZ: You mentioned Trump’s lifelong strategy has been to hit back 10 times harder. Why won’t that work here?
MR. REINSCH: I think it won’t work because – well, he – for two reasons. One, I think he’s underestimating the political unhappiness in this country, which we first – well, not first – but which we saw yesterday. And that’s only going to grow.
MR. SCHWARTZ: Well, and the American people are not yet unhappy. They’re unhappy about –
MR. MILLER: They haven’t been affected yet.
MR. SCHWARTZ: When are the American people going to feel the effects of this trade war?
MR. REINSCH: When the price of their iPhone goes up $200 and the price of their car goes up $6,000.
MR. MILLER: That’s about right.
MR. REINSCH: That would be the tipping point, I think.
MR. MILLER: Yeah. At the moment tariffs on steel affect downstream producers, but probably not the consumer ultimately.
MR. SCHWARTZ: You’re not going to notice a quarter – an increase on a six-pack of beer.
MR. MILLER: If they could even pass it along. I mean, the prices are fairly sticky in the retail market. And so both the can producers and the companies that put good stuff inside the cans will have difficulty passing those price increases along.
MR. SCHWARTZ: I mean, if you’re Budweiser, if you’re Coors, you don’t want the price of your beer to go up because you make a good product and you put it out at a good price. And there’s so many microbrews, and there’s so many –
MR. MILLER: And there’s tons and tons of price competition. Price competition is very sharp at retail, which makes prices sticky. So probably a lot of – if you have tariffs on intermediates or raw materials, they’re very hard to pass along. In the long run they will, because everything is, but it’s when – it’s when we finally get to tariffs on consumer goods, where the retailer does not have enough flexibility to not pass along the costs.
MR. SCHWARTZ: I forgot to make Miller. Miller makes a terrific product.
MR. MILLER: They do. They do.
MR. REINSCH: (Laughs.) No comment. (Laughter.) I usually go with Blue Moon, but that’s not in the same category, I don’t think.
But I –
MR. SCHWARTZ: Put that in a different category of beer.
MR. MILLER: That’s Coors, but yeah.
MR. REINSCH: Oh, is it really?
MR. MILLER: Yeah. It’s brewed by Coors.
MR. REINSCH: Oh, I didn’t know that.
MR. SCHWARTZ: I didn’t know that either. You learn something new every day on The Trade Guys.
MR. MILLER: Now, there you go.
MR. REINSCH: Well, the interconnected world. But let me go back to your earlier question, which is why won’t it work? The other reason it won’t work is because for the Chinese it won’t just be about tariffs. There’s a lot of other things they can do to hit back at us. They can – and they’ve already announced some of them. You know, instead of inspecting, you know, every 15th shipment of pork, they will inspect every shipment of pork. And if it’s –
MR. SCHWARTZ: And they have the people to do it.
MR. REINSCH: They have people to do it. And if it’s a perishable item, you don’t even need to find flaw. You just keep it on the dock for three weeks and it rots.
MR. SCHWARTZ: Oh, that sounds terrible.
MR. REINSCH: And so there’s a lot of –
MR. MILLER: And then there’s an entire – an entire cast of characters with American-headquartered firms with operations in China that don’t have anything to do with the trade rules, but where China’s regulation can be – usually is quite discriminatory and can become more discriminatory.
MR. REINSCH: I can see them coming into the Foxconn – which is a Taiwanese – the global world. Foxconn, which is a Taiwanese company, assembles iPhones in Shenzhen, which is in mainland China, and employs a lot of Chinese. I can see – and, I mean, these things are not cost-free for China. I can see Chinese inspectors coming into that plant and closing them down – finding 12 safety violations and it takes three months to fix them, and then all of a sudden you’ve got a supply chain interruption. And, you know, we used to live in a world – the automobile industry’s a good example of this – we used to live in a world where, you know, the people that did the final assembly had piles of inventory. You know, they had warehouses full of axles and wheels and tires and, you know, brake assemblies. And now it’s all just-in-time inventory.
When 9/11 occurred, and the border with Canada was closed for a while – this is a Canada story, not a China story – that caused huge problems for auto manufacturers because they were used to shipping stuff back and forth across the border. So they would get their wire harness assemblies or their – you know, their transmissions in real time. So the assembly line in Detroit needed them, you know, Thursday afternoon. They’d arrive from Windsor Thursday morning. And it’s saved the companies millions of dollars in storage costs, and in inventory loss and damage. But –
MR. MILLER: Yes. Modern logistics allows that.
MR. REINSCH: Yes.
MR. MILLER: But it can be taken away.
MR. REINSCH: It creates a vulnerability.
MR. SCHWARTZ: And isn’t the St. Lawrence Seaway, where they ship from Windsor to Detroit, the most frequently trafficked –
MR. REINSCH: You just go – just go across the bridge.
MR. MILLER: Well, the bridge and the tunnel are, definitely.
MR. REINSCH: The bridge and tunnel.
MR. MILLER: That’s the most important crossing point of any U.S. port of entry, is the Ambassador Bridge and the Detroit-Windsor Tunnel.
MR. REINSCH: At that time, you had 12-hour backup of trucks waiting to get into the United States. Now, there was kind of a national emergency. It was post-9/11. It didn’t last very long. But it taught a lot of people a lesson that you can save a lot of money with just-in-time inventory, but you do create this vulnerability. If you’re in the iPhone business – or, the smartphone business, let’s not talk about it in a single company –
MR. SCHWARTZ: We love Apple here at CSIS and The Trade Guys. We love Apple.
MR. REINSCH: We do love Apple. I’ve got one right here sitting next to me.
MR. SCHWARTZ: Me too. And I wouldn’t want to have a problem getting one, you know, next year when I need to renew.
MR. REINSCH: The next one, yes.
MR. MILLER: But think about value added, which – of which the Chinese would be aware. The iPhone – the iPhone assembly in China is about $6 of the total value of the phone. So China loses very little bit interrupting production, whereas –
MR. SCHWARTZ: We lose a lot.
MR. MILLER: We lose a lot – all the intellectual property, all the design, all the software, which is – which is U.S. content.
MR. SCHWARTZ: OK. So back to President Trump. Clearly he wants – he wants to do something that’s going to help America. He doesn’t want to do something that’s going to hurt America. But if wages are suppressed, and we lose jobs, and products are harder to get and more expensive, how is that helping America? Where is there – I don’t see who benefits from this trade war yet.
MR. REINSCH: Well, I think the answer is nobody. But I think his theory – and Secretary Ross really talked about this a little bit yesterday – his theory is that everything you just said is a short-term problem that we’ll get beyond, because the other countries will concede and do what we want, and it’ll be a better world.
MR. SCHWARTZ: And then we win.
MR. REINSCH: And then we win, yes.
MR. SCHWARTZ: And what do we win once the other countries concede?
MR. REINSCH: We win, on the Chinese part, behavior that we like as opposed to behavior we don’t like. No more cheating, I guess is what we win from the Chinese.
MR. MILLER: Yes, we extract certain concessions from all the people we’re tormenting now. And then life will be magnificent and luxurious.
MR. SCHWARTZ: OK. But – (laughter) – but life is not going to be magnificent and luxurious if people don’t get a raise and if people can’t get products for a price that they feel good about.
MR. MILLER: Right. And this comes down to whether the president’s theory of the case here is really well thought out. Most of us don’t think it is based on history.
MR. SCHWARTZ: Do the Chinese seem likely to concede on anything that we’re – because – on anything because of what we’re doing right now?
MR. REINSCH: I think they would be happy to concede on market access. A deal in which they agree to buy more stuff they would be happy to do, because they’re willing to buy more stuff anyway, and make it part of a deal, that’s fine. On the questions where we’re pressing them – technology transfer, IP theft, things like that – I don’t think they’re willing to concede. We’ve talked about this before. I think for them these are national security issues. And these are how you control the internet issues.
MR. SCHWARTZ: All right. On Europe, what’s likely to happen in the short term here? And on Canada, what’s likely to happen in the short-term here?
MR. MILLER: It’s hard to say. I think there will be moves to address the problem, but the question is how many bilateral negotiations of managed rate can you accommodate all at once? And so I think the president has – and his team – have manufactured a lot of problems now which they have to solve in a very tailored and specific way with each of the people they’ve caused the problems with.
MR. SCHWARTZ: Well, he announced the other day that we’re going to have a space command. Maybe we need a trade command.
MR. REINSCH: (Laughs.) We – I’ve been predicting –
MR. SCHWARTZ: General Bill. (Laughter.)
MR. REINSCH: I’ll volunteer.
MR. MILLER: There’ll be snazzy uniforms, that’s for sure.
MR. SCHWARTZ: Definitely. (Laughter.) Made in America.
MR. REINSCH: And great hats.
MR. MILLER: And great hats. We’ll have great hats.
MR. REINSCH: Make trade great again.
MR. MILLER: Yes, I can see it.
MR. SCHWARTZ: All right.
MR. REINSCH: I’ve been predicting for six months that he’s going to turn to Europe, probably late summer/early fall, partly because we’re running out of other people to abuse. But I think we’ll end up with a negotiation with Europe. Europe is saying that –
MR. MILLER: They want it.
MR. REINSCH: They want it. I mean, what they want is their agenda. But that’s why you have a negotiation, you know? So I think – I think we get there. And probably his advisors will tell him – and this is sort of – this is a TPP argument but it’s even more true for Europe – that if you want to achieve something with China, you need to outnumber and outmaneuver them. You really do need to surround them, basically. And the best place to go to do that is Europe. You know, the trade – tariffs today are fairly low. There are peaks, but they are fairly low. The real trade negotiation is about standards, rules, inspection procedures. The way you keep other people’s stuff out of your country now is not by tariffs.
If we and the Europeans can get together on those things, we create the largest middle class consuming market in the world. And the message to producers globally is: If you want access to that market, you got to do it our way. And our way will be the European way and the American way, and the Chinese will have to, you know, fit in with those rules. That was the idea of TPP. That was the idea of TTIP. The Europeans get that. I think eventually the president will get it – our president will get it too. And that’s the basis for a negotiation – not an easy one.
MR. MILLER: Yeah, no, it’s a tremendous amount of work. The standards are quite down in the weeds. And even in industries which are quite global, like chemicals, we have very different regulatory systems. REACH in Europe is very different than TSCA in the United States. On autos – it’s one of the big differences on autos is the European regulatory system differs quite markedly from the U.S. one. So there’s – and that work – that work can take a lot of effort. But it’s – Bill’s right.
MR. REINSCH: And the saving part of that is all the different regulations have the same objective, it’s to make the car safe.
MR. MILLER: Or more carbon efficient.
MR. REINSCH: It’s not that – yeah, it’s not that we want dangerous cars and they don’t. It’s about – yeah, it’s about more fuel efficiency. It’s about how you get there. And Scott’s right, the differences are important. And they’ve been insurmountable. I mean, this is not a new thing. We’ve been trying to deal with this for 30 years. But the reason to do it now is more compelling than it ever has been.
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 it. 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.