Peter Friedmann's View from Washington DC -- February 2017

Trade Policy Under Trump: Not as Dramatic as Advertised?

Threats to trade (“the Wall,” China currency manipulation, NAFTA, TPP) are turning out to be a lot less dramatic than originally promised (or threatened):

First, let’s dispense with his campaign promise to declare China a “currency manipulator” on “day one.” There is long standing process by which such a Presidential declaration would set in motion a review of a country’s initiatives to lower the value of its currency (to make its exports more affordable/competitive in global markets). If found to be manipulating its currency, the US could impose trade sanctions. Most trade economists feel it’s a very dangerous step for the US to take. Regardless, we are already a month into Mr. Trump’s presidency, he has made no such declaration, and none appears to be imminent. So much for “day one”.

Now, to “the Wall.” Already he and his Administration are back peddling. When asked about the Wall, his nominee for Dept. of Homeland Security, who will have responsibility for the southern border, said his top infrastructure priority is to enhance roadways to facilitate the flow of “private and commercial vehicles.” Sounds more like a freeway than a “wall”, doesn’t it? It sounds like he is anticipating more cross-border traffic and trade, not less.

NAFTA – all 3 candidates (Trump, Clinton and Sanders) promised to repeal or at least redo it - a big threat to the trade relationship with Mexico. So far, to great fanfare, President Trump has limited Carrier and Ford’s move of additional manufacturing to Mexico. But he has also communicated with his Mexican counterpart, who, to many observers’ surprise, welcomed a review and update of the NAFTA pact, now 23 years old. The trumpeted “repeal” or “renegotiation” of NAFTA may actually turn out to be a technical, lengthy and mutually agreed updating. At this stage, in no way does it indicate a curtailment of trade between our countries.

TPP – like NAFTA, was a favorite punching bag of all 3 presidential candidates. And it never had the votes to pass Congress. So when Trump withdrew the US from TransPacific Partnership – nobody in DC was surprised, many were relieved. The bigger question – will he turn his back on trade with the TPP countries? His words and actions strongly suggest not: he has met with the Prime Minister Abe of Japan, leading to an announcement of mutual interest in a bilateral trade treaty. His Secretary of Commerce has spoken of bilateral trade treaty negotiations with Vietnam (which for US importers was to be the principal benefit of the TPP). The US already has free trade agreements with virtually all other TPP countries – Mexico, Canada, Chile, Peru, Korea, Australia. So we might end up pretty close to a Pacific Rim free trade area, not exactly the same as TPP, but not so far removed.

What about the promised 35% tariff on imports from China and Mexico? This has quickly become very complicated – the overhaul of the US corporate tax code is driving this debate, which will be long and complex. The objective is to reduce the US corporate tax rate from 35%, the highest in the world now, to a more typical level (20%). This would mean loss of billions of revenue in Federal coffers (another reason not expect a multi-billion dollar “Wall” to be built anytime soon). The Chair of the tax writing committee in the House of Representatives has proposed to replace the lost revenue by a new approach – taxing corporations not by their HQ location, but where the goods they sell are manufactured. Specifically, they could not deduct as an expense the cost of imported goods that they sell (but goods made/grown/processed here in the US could be deducted). Essentially, this means a 20% tax on imports, paid by the importer.

Already, battle lines are drawn. Retailers are mounting a massive opposition campaign (as most things US retailers sell are made overseas). This is seen as highly protectionist, leading to significant increases in prices charged to US consumers. Executives of the largest retailers met personally with the President this week; he clearly was not endorsing this “border adjustability” plan. He criticized it as “too complicated” reflecting a reluctance to jump too quickly into the trade policy quagmire – which as we know, truly is “complicated.”

Before his crash course in the reality of trade and politics, (including his travel/immigration ban debacle), simple “solutions” were a lot easier to announce. He appears to be gaining an appreciation of the complexity of trade, and has been conspicuously silent on previously threatened across-the-board tariff increases. A little more silence wouldn’t be a bad thing.

Peter Friedmann

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