Winners and Losers
May 20, 2019
To misquote Garrison Keillor, it has not been a quiet week in Lake Woebegone, or in Washington. Between continued China maneuvering, decisions on auto tariffs and steel and aluminum tariffs, along with an important meeting between House Democrats and Ambassador Lighthizer on the United States-Canada-Mexico Trade Agreement (USMCA), there was more trade news last week than we have seen in months. Let's look at who won and lost in these various decisions.
Winner (temporarily): auto manufacturers everywhere as well as consumers. There appears to be only one person in the world who thinks auto tariffs are a good idea, and, unfortunately, he is the one who gets to make the decision. The decision was to defer for six months while instructing the U.S. Trade Representative to negotiate with the European Union and Japan and perhaps others on auto import limits. By kicking the can, the president gave everybody a reprieve and allowed them to avoid the massive damage to our economy the tariffs would cause. Of, course, six months from now, the tariffs could be back on the table, and we will go through another period of uncertainty, but for the time being let's just be grateful for a few months’ peace.
Winners: The United States, Canada, Mexico, and the USMCA. There were two pieces of good news for the USMCA this week. Ambassador Lighthizer's meeting with House Speaker Nancy Pelosi and other Democratic leaders concluded with happy noises from the Democrats. Their issues with the USMCA agreement (labor, environment, enforcement, drug prices) were not resolved, but the willingness to work on them was evident on both sides, and the Democrats' demands are still careful not to cross red lines. Equally important, the president announced the end of the steel and aluminum tariffs on Canada and Mexico, thus removing a major irritant that was holding up Mexican and Canadian approval of the agreement and threatening it in the U.S. Congress due to Republican opposition to the tariffs. The president's action will also lead to an improvement in relations with the other two countries, both of which were deeply offended by the imposition of tariffs for national security reasons, the equivalent of calling them both the enemy.
Loser: Huawei. The president's executive order directing new actions in 150 days against foreign companies that endanger our security and the decision to place Huawei on the "Entities List" add a new element of complexity to U.S.-China relations and could jeopardize the company's business worldwide. Placement on the Entities List means that going forward an export license will be required for all exports to the entity from pencils and coffee mugs to the latest generation of semiconductor chips. That does not necessarily mean all licenses will be denied—pencils probably do not threaten our security unless we are in the midst of a graphite shortage—but the action gives the government the opportunity to see who is selling what to Huawei and to influence its production capabilities. Note also that the underlying U.S. law is extraterritorial—foreign items being sold to Huawei that have more than 25 percent U.S. content will also require a U.S. export license. Without knowing the details of Huawei's supply chain, it is difficult to say how crippling this action might be, but for the complex products, Huawei makes it would not be surprising to see them dependent on the United States for at least a few critical components. If so, license denials could effectively put them out of business, at least until they locate or develop alternative sources of supply.
This decision, by the way, merits a column of its own. It is right at the intersection of trade and security. It is tempting to see it as just another Trumpian attempt to leverage a negotiation that seems to be slowly coming apart, but I learned when I was in government in the 1990s not to second-guess the intelligence people (career, not political) when they see a risk. They always know more than I do about the situation, and if they say there is a problem, I'm not going to say there is not. In the case of Huawei, it is a fair conclusion that the decision was actually security-based and not just a tactical move. Of course, as the president demonstrated last year in the ZTE case, he will not let facts get in the way of a decision he wants to make for other reasons, so it is impossible to predict Huawei's ultimate fate.
Losers: The United States and China. What appeared to be a negotiation heading for a successful ending now looks more like a slow-motion train wreck with both sides preparing for a protracted siege rather than a happy ending. I was surprised by this but in retrospect should not have been. My mistake was believing the president's tweets. I should know better. I have explained in the past why the Chinese will not meet our demands—they threaten the Chinese Communist Party's control—which means the best the president can do is a weak agreement (that he will declare a great success). We will probably still get there because the other alternative is a protracted trade war, which would mean long term pain and no gain and certainly political pain for the president. In the short term, however, both countries are switching to chest-beating nationalism, which will push a resolution farther away, making both countries losers for the time being.
So, that is this week's scorecard. Note that the United States is both a winner and a loser and that in both cases, the victory or loss is not final. The president's overall trade grade continues to be incomplete.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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