It has been two years since the fateful Referendum of 2016, yet Brexit remains as divisive as ever. May, already damaged by a disastrous General Election in 2017, struggles to hold together a cabinet divided between “hard” and “soft” Brexit. Ministerial infighting has led to incoherent policies that have weakened both the UK’s negotiating position and its international credibility. The recent departures, especially that of Johnson – who commands a large following among the Tory faithful – have only worsened political instability, leading to rumours of a leadership challenge within the Conservative Party. Meanwhile, time for negotiation is fast running out: the 29 March 2019 Brexit deadline is less than a year away. While the announced deadline is March, the practical end date is even sooner, as the EU side needs time to approve the final deal. While a “soft Brexit” may not be ideal, a “no-deal Brexit” would be catastrophic. British agricultural and automobile exports could face EU tariffs of up to 40% and 10% respectively. Trade in services would also be adversely affected by a loss of passporting rights, which allow British businesses to sell services Europe-wide without having to obtain a license from individual members. Significant trade disruption would be also ensue as the UK replaces the EU Customs Union and various European regulatory agencies with local equivalents.
Hence, writes Lighthizer, the need for another $200 billion in products on today’s list. Why? Because China cannot respond in the same measured way to a trade escalation of this magnitude. China does not import $250 billion in goods trade from the United States and cannot match US tariff escalation dollar-for-dollar. Therefore, it seems clear that Lighthizer believes that China will now respond “appropriately” to the original set of American complaints under the Section 301 report and stop counter-retaliating. This line of argument, however, remains deeply flawed for at least four reasons. First, simply because the Chinese cannot retaliate using tariffs to match the US escalation does not mean that the Chinese cannot retaliate. They have myriad tools at their disposal to respond, as we have pointed out in previous Talking Trade posts. These include targeting US services, US companies on the ground in China, US investments and so forth.
Now that tariffs have been imposed, negotiations have not started. Instead, Trump seems determined to continue to escalate. Rather than make movements towards resolving issues, he has now threatened to impose tariffs on every product imported from China—all $500 billion. Since China does not import an equivalent amount of goods from the United States, it cannot simply match tariff rate hikes to tariff rate hikes. It will end up getting creative instead, assuming President Trump follows through on his threats and keeps ratcheting up tariffs on Chinese made goods. China could respond in many ways. It can scrupulously enforce myriad domestic laws against American companies in China that are currently only weakly followed now. It could much more rigorously check for compliance with every regulation, type of paperwork and so forth.
EMs could see a rise in exports in some sectors. Agricultural producers in EMs could stand to gain from China's counter attack to impose a 25% tariff on American farm commodities. The U.S., being the biggest exporter of cotton and soybeans to China and the world, will be greatly affected. However, this means that EM producers have a chance to play. China has already sought alternative sources of cotton months, in preparation for a possible trade war. India, the world’s second-biggest cotton exporter, has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in the rare advance deal. India’s total cotton exports for this season is expected to be up 20%, to 7 million bales. China has also turned to other sources of soybeans, which is integral to make animal feed. It is likely to buy more from the other three top exporters – Paraguay, Argentina and Brazil. China’s share of South America’s regional soybean exports is expected to increase to 90% from June to December this year.
Surprisingly, few Harley Davidson employees – many of whom are Trump supporters – appear disillusioned with the president’s protectionism. “He wouldn’t do it unless it needed to be done, he’s a very smart businessman,” one worker told the Financial Times serenely, encapsulating the “In Trump We Trust” attitude that persists among many in the President’s base. Many workers were, in fact, apparently quick to point an accusing finger at the EU and even Harley Davidson itself for leaving its traditional base in Wisconsin. They are resolutely defending Trump’s claim to be “just trying to save the US aluminum and steel industry” from the unfair trade practices of foreign countries. Other US presidents would surely have been crucified for less. Trade experts predicting that protectionism would threaten US jobs have been vindicated by Harley Davidson’s pull-out. Working class Trump supporters have the most to lose. Why then do American workers continue to support Trump’s flawed protectionism? It would be easy to dismiss Trump supporters as unwise or easily deceived. Yet, this would merely trivialize a more serious problem plaguing trade politics today. Caught up in a wave of identity politics, how a policy actually affects the US economy is now arguably less important to voters than who is actually articulating it.