July 5, 2018 | By Brian Hanson, Phil Levy

Deep Dish: Global Trade Update - China, Europe, and NAFTA

The United States has gone from threats to action on a number of trade fronts. China and Europe are both retaliating, while NAFTA negotiations continue to slog on. To help see the big picture, global economy fellow Phil Levy joins Brian Hanson on this week's Deep Dish.



Brian Hanson: This is Deep Dish on Global Affairs, going beyond the headlines on critical global issues. I'm Brian Hanson, and today we're talking about global trade and increased tensions around the world. To help unpack this topic, I'm joined by Phil Levy, who's our senior fellow for global economy at the Chicago Council on Global Affairs. And Phil was also a former trade official in the White House and the state department under George W. Bush.

Welcome, Phil. It's great to have you on.

Phil Levy: Great to be back.

Brian Hanson: So as we all know, this has an incredibly busy time for international trade issues. There's just been a constant barrage of Tweets, threats, actions, on trade, and increasingly talk about a potential trade war. As a matter of fact, as we record this on Thursday, July 5, the Trump administration has announced that tomorrow it's going to impose a new set of tariffs on $34 billion worth of Chinese goods. And over the course of this administration, certainly Trump ran for presidency on a very challenging platform about trade and concerned about the US being taken advantage of, and there's been a ton of activity.

And what I'm really looking forward to doing with you, Phil, is taking a step back from the Tweet-by-Tweet moment, and get a better assessment of where we are in the big picture, what we should be paying attention to and where we might be going.

So if I can start, let me just ask, what has President Trump done? What's been the arc over the last year, and is there anything new really going on now?

Phil Levy: Yeah. Well, you're absolutely right, that it can be hard to disentangle, because the rhetoric was there all along, back in March, when there was the announcement that the US was going to do to steel and aluminum tariffs. The press secretary at one point came out and said, "I don't know why you're all surprised. He's been saying this stuff for decades." But while he has been, I think you had two schools of thought which sort of placated people on the topic. One school was, "This is a lot of rhetoric. It's expressing sympathy with people who are dealing with imports, but he doesn't actually mean it." A second school of thought said, "He kind of means it, but all of these measures that he's taking are a means to an end. It's a way that he's going to get leverage, go into negotiations, and get the better deals that he has promised."

What we've been seeing, especially over the last couple months, is that there are not really better deals on the horizon, and he seems to like the trade actions just for their own sake. So that's part of the big picture.

Brian Hanson: And what would be a couple of examples of things where you've seen in the last couple of months where he's really taken actions that seem divorced from a broader negotiating strategy?

Phil Levy: I think one of the biggest things in the last couple months was the decision in the beginning of June to extend the steel and aluminum tariffs against Europe and against Canada and Mexico, that this dramatically heightened the impact of these on American businesses, on those that were using imported steel and aluminum, and it went a long ways to invoking fighting, retaliation, and alienating our allies.

I think when you look at the ongoing conflict with China, this weakened the US. You've had China now proposing an alliance with Europe to stand up to American perpetuism. That's the opposite of the configuration you'd want if we were really serious about some of the trade concerns we have with China, that this actually weakens the US position, nor does it show a lot of sign of resolving itself in the near future.

Brian Hanson: And could you just take through kind of what are the big things on the table that are either being implemented now or kind of are on the verge of taking effect?

Phil Levy: Yeah. It's a growing list. You had asked earlier, going back to the start of the administration, in terms of actions, there was the withdrawal from the TPP, the Trans-Pacific Partnership, but we had never actually implemented that, so this was sort of a failure to advance a plan that was near completion. Beyond that, there wasn't a great deal during the president's first year. It was more of a focus on what to do with tax policy, which concluded, as you recall, right around the new year.

Since then, there was some aggressive action on things like Chinese soft- ... excuse me. There was some aggressive action on Canadian softwood lumber imports, which revived an old dispute. There were some terribly novel moves on safeguards, which went after washing machines and solar panels. And then in March, we have the announcement of the national security tariffs, that was the motivation that was given, on steel and aluminum. It didn't fully come into effect then. Almost immediately, the White House said, "Well, we'll exclude countries that accounted for about two-thirds of US steel imports," for example. And those exclusions were supposed to be temporary, but at the end of April, they were rolled over for another month.

The one other thing that I'll sort of add in as a major thing was there was an investigation by the administration of Chinese intellectual property practices. This sometimes goes under the Section 301 intellectual property rules category. So that was what then led to the threat of initially 50 billion ... of tariffs on $50 billion worth of trade with China.

So there's quite a lot. It's all sort of concurrent. Those are the tariffs that are then supposed to kick in tomorrow, on July 6th. The March exclusion that was then rolled over all the way through the month of May, that was terminated in early June. So in terms of actions, it was in early June that the other two-thirds of US steel trade started getting hit, and that was what prompted a lot retaliation. Some countries, like Japan, that held off on retaliation, even though they were in the initial batch hit, but now we're getting billions and billions worth of retaliation coming from a whole range of countries, such as Canada, Mexico, the European Union, India, and they're all filing cases against the United States at the World Trade Organization, as well.

Brian Hanson: And by retaliation, you mean that these countries are imposing tariffs on US goods in response to the tariffs we've been putting on?

Phil Levy: Exactly. It's often imposition of tariffs. Sometimes, for example, in China's case, they seem to be planning to stop purchases that they might otherwise do, for example, of soybeans. But yes, that's largely the response to sticking tariffs on, and that's what they're doing.

Brian Hanson: And soybeans are interesting. I believe one out of every three soybeans grown in the United States is sold to China, so that's potentially a lot of leverage.

So if these are the things that are kind of in play now, there are also some big things on the horizon. And just quickly, one of those is NAFTA negotiations, and the other is recent speculation about the Trump administration's position toward the WTO. What's going on with those things?

Phil Levy: Right. And they're somewhat linked, because one of the ways that the Trump administration had tried to calm down critics, often critics from within the republican party, has been to say, "This is just a means to an end. We're getting to better things. We're going to have a better NAFTA deal and we'll work stuff out." They keep promising the NAFTA deal is just around the corner, except there's no indication that it is. We actually had some deadlines that were real deadlines that came and went.

Brian Hanson: And what does that mean? What makes it a real deadline? It's a negotiation. Why can't it just kind of keep going along?

Phil Levy: Yeah, good question. You can keep the negotiation going along if your goal is to get it through the US Congress at the end, and almost everything the administration has been talking about would require moving through the US Congress. Then you have to comply with some 2015 legislation called Trade Promotion Authority. That gives some lengthy deadlines for congress and for the US International Trade Commission to consider the effects of the agreement.

So House Speaker Paul Ryan, back in May, said, "You know what? We're pretty much right up against this deadline." There was a little quibbling of give or take a couple weeks, but by the time you got to the end of May, it was pretty clear that had passed, which means even if the administration were to strike a deal with Mexico and Canada tomorrow, they would not be able to get it through the US Congress. It just simply wouldn't have time to get through, which means it would have to be taken up by the next congress, and who knows who's in control in the next congress.

So it means that these promises of, "We're going to slip something in right after the Mexican election," are fairly empty. And of course, the Mexican election also throws a bit of a wrench in things, since they have a new congress and a new legislature coming in.

So you asked about the WTO, as well. The WTO is tricky. The WTO, there were no serious ongoing negotiations. There was a trade and services agreement that people have been talking about. The main role that the WTO had been playing, and this was true at the end of the Obama administration, as well, was dispute settlement, that they were trying to resolve disputes amicably between countries. That system was already under severe strain. You've had a dispute, again, start of the Obama administration, that heightened dramatically under the Trump administration, about appointing judges to the appellate body, which is a critical part of WTO dispute functioning. The US has put a hold on this, and it's really threatening the system.

Meanwhile, you've had the president, according to reports, saying that he wants out of the WTO, that he wants to get power from congress to impose tariffs in a way that would blatantly violate some of the central tenets of the WTO. It's not likely at all that he would get that legislation. If anything, congress is pushing in the other direction. But the very idea that that's a major motivation of this administration is quite worrisome.

Brian Hanson: Okay. You've done a really nice job of kind of laying out kind of the set of trees that are making up the forest of trade policy actions right now. One of the things that has been really interesting in talking to you about these issues is you're starting to see some broader patterns that cut across or link together what we're seeing out of this administration. Take that step back. What have we learned about Trump trade policy? Who's getting targeted, what kinds of products, what kinds of priorities? What's the broader view here?

Phil Levy: I think the broader view is that the president has a very old-school view of manufacturing and trade. It's where products are made in one country or another country. He's fond of old-line manufacturing industries such as steel, aluminum, autos, and his view is, it's basically a good thing if you apply tariffs and if all that production that's gone overseas comes back home.

What's wrong with this point of view? It neglects the major developments of the last few decades where you've had globally integrated supply chains. It's meant on things like autos, where the administration is threatening protection, the president started this out with a tweet saying, "I'm going to be talking about some new auto protection. The industry will be very, very happy." The industry was anything but happy. They said, "This is disastrous for us."

Brian Hanson: Why?

Phil Levy: If you look at the modern auto industry, it really is globally distributed. It's very hard to talk about what is a U.S. car or a North American car. You'll get cars under foreign brands that have higher American content than, say, a Ford or a GM car that we think of as American cars. This is how automakers have cut costs, is they're making various parts or doing various stages of production wherever it can be done most efficiently.

That doesn't mean it's left the United States. It hasn't. There's plenty of production both by U.S.-owned producers and by foreign-owned producers in the U.S., but all of these producers in a very competitive market have managed to stay alive by trimming costs and reallocating production. Sticking big tariffs in the middle of that threatens their entire model. It's worth remembering, we're not talking about an industry that's been awash in profits for decades. For the major U.S. manufacturers, you had two of them going broke just a decade ago.

Brian Hanson: Yeah, and as I understand, the North American model is that you've got Mexico, which can be used to produce lower-cost and lower-skill needed parts that feed into overall vehicles in the United States, and much of the auto industry is set up regionally with similar kinds of arrangements.

Phil Levy: Right.

Brian Hanson: So North America, you've got higher-end stuff in Canada and the U.S., lower-cost, simpler pieces in Mexico, and we see similar things in Asia and Europe as well. This is part of a competitive strategy. Have I got that right?

Phil Levy: Yeah, that's exactly right. If you look in Asia, you can do higher-end things in places like Japan, but lower-end things in places like China or Thailand. If you look at Europe, you've got higher-end stuff in places like Germany, France, the UK, lower-end stuff maybe in central or eastern Europe. That is how they stay competitive.

You were talking about broader trends. One of the interesting things here is there's a difference between what we're seeing now and the 1930s. In the 1930s, everybody was pulling up the drawbridge, and trying to isolate themselves and cut off trade. Here, it's the United States that's doing that, and other countries are not doing that as much, which means those other countries are going to look like competitive places to operate for businesses, and the U.S. won't look as competitive. I think one of the salient examples of that that we saw just a week or so ago was the declaration by Harley Davidson that they were going to move some production to a facility in another country because it would not be subject to retaliatory European tariffs if it moved there.

Brian Hanson: That sets up the transition I'd love to make, which is to look at the consequences of these trade actions. Of course, there's a lot of hand-wringing going on about the potential of a trade war, and you indicated the potential for retaliations of various types, but what has happened so far? Because in a lot of ways, there have been a lot of concerns, but has this really had an impact on the economy at this point?

Phil Levy: So far, you've had some important symbolic moves. They're real. If you're manufacturing auto parts in Illinois, for example, you are having serious difficulty. You're not able to get some of the steel from places like Korea that your purchasers are demanding, and this is causing pain at the moment, and you're seeing some retaliatory stuff where people are getting hit, farmers, producers in the U.S. Quantitatively, it's not huge so far. Steel and aluminum is important, but limited, just in a numerical sense.

There's a couple ways that we're seeing that this could really get to be quantitatively more significant. The first is the conflict with China. Where this starts to look most like a trade war is this idea that the president initially announced $50 billion in tariffs. There's some confusion there about whether that's the amount of tariffs or how much trade will be subject to tariffs. It looks like it's more the latter, but $50 billion. The Chinese said they would retaliate, and then the president said, "Well, if you're going to retaliate, then I'm going to retaliate against your retaliation." It's exactly that kind of spiral that looks like a trade war. We've had some very large numbers discussed, if you took seriously all of those presidential threats of how much retaliation against retaliation you might have. I'm talking about hundreds of billions of dollars.

The other area where you potentially have quantitatively very significant trade disruption is on autos, just because autos trade is really big quantitatively. It accounts for hundreds of billions. The European Union has said, for example, that if the U.S. goes ahead and blocks auto trade, there could be I think it's $300 billion of retaliation coming back, again, tariffs on $300 billion worth of goods.

A final version of where this could have an effect is if these kind of moves and the capriciousness of U.S. policy start introducing doubt into the minds of investors, and you get more of an economy-wide pulling back or retrenchment. At the moment, investors don't seem to have taken this terribly seriously, assuming that this will all get worked out, they'll just strike a deal. You could get a reevaluation as we go through the next couple months.

Brian Hanson: This is interesting, but there are a couple of quantitative estimates that have been put out about what the potential overall effects on a trade war for the economy are. What strikes me about them is, despite the billions of dollars that we're talking about, and that you just outlined, of goods that could be hit with penalties and tariffs, Goldman came out with an estimate that the trade war would only cost the world economy about $470 billion, so about the size of the economy of Thailand, which really doesn't sound like a big deal. Then Wharton School at the University of Pennsylvania estimated that by 2027, in their trade war scenario, that U.S. GDP would lose about 1% and wages would fall about 1%. Now, nobody wants to see GDP or wages go down, but those don't sound like very scary numbers. Does this mean that the concern about the trade war is overblown, or how should we interpret these findings?

Phil Levy: I think you should take them with a large grain of salt. They probably give you a lower bound on how bad a trade war might be. You get out of models like that pretty much what you put on and how you structure the models. They're not usually taking into account some of the detail that goes in when you have highly integrated supply chains, for example. We've seen in the past, when you've had things like at one point floods in Thailand, or the Fukushima disaster in Japan, that you can have a key part that misses and a whole production line shuts down. These models generally are not at that kind of detail, so they're not able to give you stuff.

There are also some other questions of what happens to investor confidence and what does it say about policy-making when we're getting such self-inflicted wounds coming from an administration. Will this all be contained and limited? You have other stories coming out about what happens if you do a big shock to China and Chinese companies that are in debt start going under. China's a big demander of products from all around the world. You can have these things propagate. It's extraordinarily difficult to come up with any sort of precise numbers when you're improvising policy like this. I would treat those ones that you mentioned as a lower bound.

Brian Hanson: What would you recommend people pay attention to as they're following the unfolding of these sets of trade actions? What are the key signals that we're headed potentially into something really, really dangerous?

Phil Levy: I think we've already gotten the signals that we're heading in a dangerous direction. The thing I would watch for is to see whether we're going to do anything about it or change course. There's a chance, of course, that the administration could pull back. There's certainly some hopefulness about that.

Yet I don't put a lot of weight on that, in part because they've already tried and failed at that. If you look at the China tariffs that are supposed to come into play, you had an episode in mid-May when the Chinese sent a top-level emissary to come and negotiate a deal, and they did. They negotiated a deal, and then Treasury Secretary Steve Mnuchin came out and said essentially, "There will be peace in our time." About a week or so later, you had Peter Navarro, a top and very protectionist White House aide, saying, "That was an unfortunate statement, and this doesn't apply. In fact, we're going ahead with the trade war."

Once you've done that, it's kind of hard to say, "Let's try that again." I think there's relatively little chance that the administration's going to back off, but who knows with this real administration. The real question is, will we avert disaster because Congress takes a stand? This will sort of avert disaster because Congress takes a stand. It's Congress that constitutionally has the power to govern these things. You're starting to see more concerted movement in congress, but at the moment, it's being blocked.

Brian Hanson: And why is it being blocked? Who's driving that in Congress, and as you mentioned, Article 1, Section 8 gives Congress the authority to regulate trade. They have handed over a lot of power to the President through legislation over the years. So I would assume it'd take legislative action to get that authority back. Who's driving this and what are the stumbling blocks?

Phil Levy: Yeah, so there's sort of the people who are actually pushing the bill and the people who are grumbling. The ones pushing the bill, Senator Bob Corker has drafted something, notable because he is an outgoing Republican. He decided not to run again. He's a Senator from Tennessee. He's chairman of the Senate Foreign Relations Committee. It's actually a bill to deal with the national security tariffs. It's a bill that's co-sponsored by an interesting collection of other senator. It includes Ron Johnson, who is chairman of the Homeland Security Committee, but also four Democrats at last I checked, were there as co-sponsors. So this is the main vehicle that people have been pushing. His bill would require that the President, instead of being able to directly apply national security tariffs, could propose them to the Congress, but that the Congress would then need to pass these as a normal bill. So you'd have to get both House and Senate going along with this. This has been stymied. He tried to attach this to a defense authorization bill under the Farm bill and there've been blockages for various reasons.

In some cases, I think it was the Farm Bill, it was that the Democratic Senator from Ohio actually liked what President Trump was doing and didn't want this to happen. In other cases it was that it would endanger a bill. I think the fundamental thing that's going on within the Republican caucus is they're faced with a very difficult choice. Their plan for the November mid-term elections was to run on good stewardship of the economy, to celebrate the tax cuts that they had passed and sort of unity and growth. If you have a giant fight with the President over ill-advised tariffs, that really undercuts that message. So there has been a persistent hope on the part of the leadership that they could avoid a public fight like that, that they could talk to the President privately and dissuade him from doing these things. I would argue that that effort has failed, but you haven't yet seen the pressure change their views. I think, as I said, the novelty of the tariffs and the retaliation means that you haven't fully seen the kind of pressure that's going to come on members of Congress from their constituents.

So this is an important thing to watch over time. I also said there's the grumbling caucus. You have seen people in key positions, such as Orrin Hatch, who is chairman of the Senate Finance Committee, which oversees trade usually, say that he's very, very unhappy with what's going on. That hasn't translated into action, but as you know very well Brian, usually when you have the Senator who's chairman of the Oversight Committee say, "I'm very unhappy", that's often a meaningful signal on Capitol Hill.

Brian Hanson: Yeah, also in this case, it's interesting that Hatch is a Senator who's also retiring, so the people who've been most vocal on the Republican side have been folks that are not seeking re-election.

Phil Levy: Yes, it is true that the most vocal people have been the retiring ones. Ron Johnson is not retiring from Wisconsin and the person who's also pushing this hard, Pat Toomey from Pennsylvania, is not retiring. And people like Senator Mike Lee have also been pushing this stuff very actively. Not particularly that bill, but he had a different bill. So it is heavily driven by people are immune to opposition, say, in a primary campaign, but not exclusively.

Brian Hanson: When we think about Congress and trade policy, we usually think about the economic producers in the districts of Congresspeople or in states when it comes to the Senate. You'd indicated that at this point, there hasn't been as much pressure from those constituencies as we might see. Where do things stand? Where have industry groups and agriculture groups lined up so far?

Phil Levy: The industry groups have been remarkably vocal. If you look at, say the U.S. Chamber of Commerce, they've come out and taken very bold stands saying that this is disastrous. I think various farm groups have come out and said, "We really care about this." I don't think you've had the full effects felt yet and I think there's some sentiment, not with these groups but with sort of the people in various Congressional districts and states, who had supported the President, that it's all leverage. He's taking us to a better place. I don't think that's right. I don't think there's much evidence of that, but that may be one reason why the pressure's not greater than it currently is.

Brian Hanson: So let me engage that point because of whether or not this is going to lead to something better. It was a piece that came out today, a piece of reporting that says the EU, the European Union is considering eliminating car tariffs in order to avoid a trade war to the United States. The administration, I presume, would point to that and say, "See? We're getting results."

Phil Levy: They might, and they might have worked their way all the way back to where the U.S. was when they took office, which was that under the Obama administration, there was a transatlantic trade and investment partnership, known as TTIP, that would've had this effect of reducing auto tariffs between the U.S. and Europe. So yes, countries are trying things, and in fact, if you looked at some of the things, barriers across Asia, those would've been reduced with the Transpacific Partnership. So that's not really an achievement when you get right back to where you started before you started a disruptive path. I think the other thing that's interesting about those reports is it's very unlikely that Europeans simply say, "We'll just eliminate all of our auto tariffs and there we go." It's more likely they say, "We're going to engage in a negotiation. So we might get rid of our 10% tariffs on autos. You need to get rid of your 25% tariff on light trucks", which President Trump has not discussed very much, but the U.S. maintains as well. There's a question of meeting W2O rules by extending this to a sufficient number of countries.

You can't really just do this sort of bilaterally. What do you do with non-tariff barriers? This is how trade negotiations, these days, get complex. Are you applying this to parts as well to sort of finished goods? So I think this is European willingness to engage in this sort of prolonged complicated negotiations. That has not been something that President Trump has shown any appetite for.

Brian Hanson: So clearly, you're very pessimistic about where we are and where we're headed, potentially, on trade. As we close, I want to ask you to highlight for us, what are the overlooked aspects of the trade coverage and our understanding of what's going on in these politics, and what would you encourage people to focus on so they can not get caught up and lost in the minutia of the day to day, but really get a big picture of where we're heading and is it headed in a good or bad direction?

Phil Levy: I think the question that you asked about is this European response positive, I think the real question is: is there any sign that the President's unorthodox approach is having a payoff and that we're getting towards any place good? So far, I would argue there haven't been. You've had countries that say they're willing to engage in negotiations. That's something the president has trumpeted with NAFTA re-negotiations, for example. But that's not a novelty. Countries were willing to talk all the way along. If you say, "I want actual results, where has the President's approach achieved anything?" You really have one candidate total and that was a reworked agreement with Korea, 'cause striking things about this were, first, it was quite minor. The concessions that they got from Korea did not amount to very much at all, and the second thing was, to the extent they were doing things, it was often to lock in protectionism, it was not this world of freer and fairer trade. So I would say, if someone wants to make the case that this is a productive approach, it would be nice to have at least one piece of evidence that indicated success.

Brian Hanson: So we'll look for that. I'd encourage our listeners to look for Phil's commentary on trade. He's been all over the major newspapers, networks and media outlets, and I appreciate, Phil, you being here and taking time to talk with me on Deep Dish.

Phil Levy: My pleasure, thank you.

Brian Hanson: And thank you for tuning into this episode of Deep Dish on Global Affairs. As a reminder, the opinions you heard today belong to the people who express them and not the Chicago Council on Global Affairs. If you like the show, please let us know by tapping the subscribe button on your podcast app. You can find us under Deep Dish on Global Affairs, wherever you listen to podcasts. And if you think you know someone who'd be interested in this episode, please take a moment, tap the share button and send it to them. If you have any questions about what you've heard today or if you want to know about upcoming episodes in advance, submit questions to upcoming guests, please join our Facebook group which is Deep Dish on Global Affairs. This episode of Deep Dish was produced by Evan Fazio. I'm Brian Hanson and we'll be back soon with another slice of Deep Dish.


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