232: A Bad idea Getting Worse

The potential use of Section 232 on autos appears to be driven by Trump’s personal irritation that American tariffs on cars is just 2.5%, while tariffs on autos in other markets can be higher.  He and Ross have repeatedly argued that it is profoundly unfair that reciprocity does not work in the international trading system.  By this, they mean that tariffs are not equal, ie 2.5% tariffs are matched by 2.5% tariffs. By using Section 232, however, Trump and Ross would be able to raise the tariffs on autos to something considerably higher.  (Note, however, that the US still imposes a 25% tariff on pickup trucks, which represent a substantial portion of the market.) The global rules do allow national security exceptions and let countries “break” bindings on tariff ceilings.  The US could, in theory, raise auto tariffs above the current rates and get closer to what Trump and Ross seem to want. But the costs of doing so would be catastrophic.  While there was basically no rationale for raising tariffs on steel and aluminum (particularly not when granting some country exemptions and then some firm exemptions), there is absolutely no reason for granting national security exceptions to autos to the United States during a time of peace.

301 Continues: The Public Hearings

The much-dreaded trade war between China and the United States over Section 301 has been averted for now as Washington and Beijing concluded talks over the weekend. Both sides announced that a consensus has been reached, agreeing that there is a need to reduce the United States’ trade deficit in goods with China and to create a fair environment for competition between firms. However, if the negotiations break down at any point in the future, the US has completed the necessary second step of the Section 301 process to be able to impose 25% tariffs on Chinese products in the future.  From 15-17 May 2018, USTR convened hearings with Section 301 Committee members and industry players to discuss the pros and cons of the tariff plan. Over the course of 3 days, 105 individuals testified to how the tariffs would affect their companies, industries or the American economy. A prevalent sentiment among the witnesses was that the tariffs would cause “disproportionate harm” to U.S. businesses and consumers across all sectors.  This Talking Trade post unpacks these comments.

Commenting on Section 301: Growing Public Opposition

This is an important week for the ongoing US Section 301 case against China.  The public comment period closed last week—attracting a record number of submissions--2857 and counting.  This week, the US Trade Representative’s (USTR) office will be holding public hearings on the matter.  By the end of next week, the United States will be in a position to impose sanctions against China at any time.
Such sanctions may be delayed, of course, as a result of discussions in Washington with China’s top negotiator, Liu He. In the meantime, it is worthwhile to examine the type of comments that arrived under the Section 301 request to see what level of support seems forthcoming for a hard reaction, represented by an opening salvo of 25% tariff increases on $50 billion in goods. 

Excess Capacity in Steel? Not so Much...

We conclude there is no compelling case for governments going spare over global excess capacity in manufacturing. From the perspective of the global trading system, a nation’s excess production capacity is not the issue per se but the harm such excess capacity does to trading partners is. We build our case first by critically evaluating the implementation of the only G20 initiative to tackle sectoral excess capacity, namely in the steel sector. The dissatisfaction of key steel sector stakeholders with this initiative’s execution is merited. That the steel sector is plagued by trade distortions is not in question, how the G20 has gone about tackling it is. Then we muster empirical evidence that sheds light on how little global trade is in sectors where China has excess capacity. Moreover, exports from these sectors account for only a small share of China’s total exports. Critically we show how systemically unimportant are the trade-related knock-on effects of excess capacity such as import surges and how infrequently G20 governments have bothered to respond to import surges in excess capacity sectors during the past 10 years.

The Need for Sectoral Annexes in RCEP

While overall rules for standards and conformity assessment procedures in RCEP are necessary to reducing non-tariff barriers in Asia and facilitating trade, the example of cosmetics shows why sectoral approaches are also important.  Individual industries face particular challenges that cannot always be handled through generalized rules.  Cosmetics firms need to know which substances can, and which substances cannot, be included in products prior to manufacture.  Government officials are not always well positioned—on their own—to know the answers to such questions as which coloring agents might usefully be included in cosmetic products in the first place.  Hence it is also important to include industry representatives in the creation of rules and regulations.  Government should have the final say, but there is clearly a role for industry in crafting sensible policies that apply to a particular sector.