American trade policy has been like the proverbial frog in a pot, slowly simmering under increasing heat. At a certain point, the frog will not be able to survive, even if it were suddenly rescued. The US, it appears, has reached this juncture. Were any country other than the United States to have taken this set of steps in a week, Washington would have been aghast. Instead, it was largely shrugged off as “just another week in DC.” The fact that the United States could take such actions as escalating tariffs to 25% on potentially $500 billion in goods from China, possibly seal the fate of one of the most important telecommunications firms globally, make national security arguments about the threat level emanating from cars arriving from US allies, and continue to watch the multilateral trade system crumble and then argue that it is “just another week” is especially telling.
The latest Trump tariff threat, of course, is designed to facilitate conclusion of the trade negotiations. Talks are scheduled for Washington DC on Thursday. It is certainly possible that the impeding escalation of tariffs will concentrate minds once more, leading to a very speedy conclusion of talks. Or not. Either way, the coming few days promise more drama on the US-China front than trade watchers have seen in months-- a major escalation of the trade war will happen on Friday or a truce. A second notable set of events takes place early next week that will also help shape global trade for the future. Dueling meetings are scheduled for Geneva and New Delhi for May 13-15. The former is the setting for the first round of talks of what is called the “plurilateral” on e-commerce in the World Trade Organization (WTO). Not all WTO member countries have agreed to join negotiations on the topic, so only a subset of members (74 so far) will sit down to start.
Companies have forgotten how much the global trade regime matters to daily firm operations. If it did, in fact, collapse, the result would be a disaster. The global trade rules are like air. They have existed for so long that companies and consumers take them for granted. They don’t even notice them any longer. But, like air, if it suddenly went away, firms and consumers would discover to their great dismay that they actually like and need air (or the global trade system) very, very much. Why do firms need the WTO? Start with the obvious issues. Right now, 164 countries are constrained in what they can do with tariffs rates. Up until this past year, WTO members did not just randomly hike tariffs overnight. Keeping tariffs consistent has allowed firms and customers to have stability and reduce risk.
The implications, as the Singaporean trade minister noted, can be hard to calculate. For instance, American importing companies will need to increase the amount of the continuous bond they hold with US Customs. In some cases, bond levels may be 20-100 times higher than prior to Trump’s tariff wars began. Shipping volumes have fallen off dramatically. This has left firms paying more for transportation as well. So it is not just 25% tariff rate increases that affect firms. The second- and third-order implications are just starting to appear. In the short run, exporting firms have several options to limit risk and exposure to higher tariffs. They can do nothing and bear higher costs, hoping to ride out a short conflict. They can work with their importing partners to effectively “share” the costs of higher tariffs. Firms should be reexamining their options to ensure that they understand their current supply chains, tariff classifications and possible sourcing alternatives. It may be prudent to tweak existing processes to move products into new tariff classifications by, for example, adding or subtracting manufacturing steps in the supply chain from one location to another.
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.