I was invited to give an informal lunch talk at the Norrbotten Chamber of Commerce in Luleå during an all-too-brief visit to Sweden last week. Below are my notes for the talk (I'm sure there were some minor differences in wording when it was actually delivered).
First of all I’d like to thank Robert Forsberg of Norrbottens Handelskammare for the chance to speak to you today. And forgive me if I’ve mangled the pronunciation! This is my first visit to Sweden, and so far I’ve been delighted by the friendly welcome you’ve all shown me. I hope you’ll all reciprocate by visiting Austin soon. Perhaps we could make it an annual migration — I can come visit you in the north of Sweden each summer to escape the heat in Texas, and you can all join us in Austin during the winter to enjoy some sunshine and breakfast tacos!
Robert has asked me to share my thoughts about the current situation in global trade. Because I don’t think I can do that without expressing some strong political views, I should probably start by saying that everything I say today represents my own personal opinions. I’m not stating the positions of Tech Ranch, and I’m very definitely not representing the United States government!
Now, just yesterday during a workshop on US market entry in Skellefteå I mentioned that politics, together with sex and religion, is a taboo subject of conversation in American culture. Today I’m going to violate that taboo, and I’ll start by declaring that I am not a fan of our current president. Donald Trump, in my opinion, has been an utterly destructive and corrupting force with only one redeeming quality that I can see — the fact that his becoming president in the first place, and the damage he’s been able to do in office, highlights an acute need to rebuild institutions not only in the United States, but across the international community, that have been slowly eroding for decades before he ever came along.
The Trump administration’s trade policies have been erratic to say the least, with actions being announced one day, then suspended a few days later, then in some cases reimposed again after that. New threats and concessions seem to appear at the president’s whim. I haven’t been able to keep up with the news this week while traveling, so it’s quite possible that I’ve missed the latest developments. The state of affairs that I’m familiar with is current as of last weekend.
Trump’s political stock in trade is grievance, and he has consistently painted the existing trading arrangements with our leading trading partners as unfair to the United States. There’s some question as to whether Trump even understands how trade policy actually functions. For example, he has repeatedly implied that tariffs are a tax paid by foreign exporting nations when in fact they are paid by the buyer.
In any case, as I’m sure you’re aware, the Trump administration touched off a trade war in early 2018 when it imposed tariffs on imports of steel and aluminum from the European Union as well as China and our partners in the North American Free Trade Agreement, Canada and Mexico. The dispute with Canada and Mexico has since been resolved, at least for the time being, but the one with the EU continues to simmer, and in fact the dispute with China has steadily escalated.
In a tit-for-tat response to the US steel and aluminum tariffs, China, Mexico, and the European Union imposed a 25% tariff on a carefully selected basket of goods; Canada also imposed a 10% tariff. These products were specifically chosen to put pressure on members of the Senate and House of Representatives from the states where these products are made. For example, one of these products is American whiskey. Kentucky, home of Senate Majority Leader Mitch McConnell, is famous as the state where Kentucky bourbon whiskey is produced.
The EU is challenging the US tariffs on steel and aluminum at the World Trade Organization, but a ruling is not expected until the second half of 2020. Meanwhile the Trump organization has also been undermining the WTO itself by holding up appointments to the organization’s Appellate Body. Two of the body’s last three members’ terms expire at the end of November. It’s supposed to be a seven-member body. If new members are not appointed, the body will be unable to make rulings with just a single member remaining in December. Incoming EU Commission President Ursula von der Leyen has said that the next European Commission will consider imposing sanctions on the U.S. if this happens, although it is not currently clear what this would entail.
President Trump has also threatened to levy tariffs on European autos and auto parts in the name of national security. Trump said he would put off a decision on potential tariffs until mid-November to allow for the U.S. and EU to negotiate. The European Union has prepared a list of goods – worth nearly $40 billion – to hit with duties if the US tariffs are imposed.
Another point of contention is subsidies for aerospace manufacturers, i.e. Boeing in the US and Airbus in the EU. This dispute is currently under two separate arbitration proceedings at the WTO, where the expected outcome is that each side will be allowed to retaliate against the other. Each side has already drawn up a list of goods that could be hit by punitive tariffs. The American list of EU goods amounts to around $25 billion which could become subject to 100% tariffs. I don’t know if the size of the proposed tariff has been announced on the European side.
In spite of all that, the state of the US-EU trading relationship is not all doom and gloom. There’s a US-EU Executive Working Group that’s been meeting every few weeks to try to find common ground, although it doesn’t appear to have made much progress. The US side has been demanding to include agriculture within the scope of the talks, while the EU has staunchly refused.
Nevertheless U.S. Ambassador to the European Union Gordon Sondland has said that he is “optimistic” about working with Ursula von der Leyen and that the new Commission will represents a chance for the U.S. and EU to “re-engage.” The U.S. is interested in moving forward on cooperating on product conformity assessments and issues around pharmaceuticals, medical devices and cybersecurity
There have also been some goodwill gestures from the European side. In July the European Union authorized 10 genetically modified organisms, and at the beginning of August the U.S. and European Union on Friday finalized a deal giving U.S. hormone-free beef exporters a specific tariff-rate quota share.
There also seems to be some movement on France’s digital services tax, which would hit American tech companies disproportionately. France has agreed to reimburse companies paying the national tax once a multilateral mechanism is decided, but the concession may not be enough to satisfy the US.
The truth is, though, that the administration is devoting far more attention to China than to Europe. The People’s Republic of China is of course the world’s second-biggest economy after the United States. It also has the second-highest military budget and second-highest greenhouse gas emissions. China and the US are each other’s largest trading partners.
In recent years the United States and China have found themselves sparring not only over trade, but also in political and military competition as well as technology and international finance. Much of the friction in the relationship can be ascribed not only to the Trump Administration’s confrontational approach, but also to more assertive behavior by China under its president Xi Jinping. Trump has the instincts of a bully, but China has probably grown too big to push around, and I’m not sure Trump realizes it.
I’ve already mentioned that China was also a target of the steel and aluminum tariffs, but since then tariffs have been imposed on a far broader range of goods. To pressure China to change its economic practices, the United States currently has tariffs on approximately half of U.S. imports from China. China has responded with tariffs of its own, prompting threats from the US to raise its duties from 25% to 30% and expand them to cover all imports from China.
The most recent moves that I’m aware of have been more conciliatory. Trump last week announced — on Twitter — that he would delay the 5 percentage point increase originally scheduled for October 1 by 15 days as a goodwill gesture. China meanwhile has stated that it will exempt 16 U.S. product lines from its retaliatory tariffs.
The situation has been especially hard on US farmers deprived of the China market, but also on industrial companies who have integrated Chinese manufacturers into their supply chains.
High-level talks between the US and China are scheduled to resume next month. Mid-level officials are meeting in Washington this week.
I truly believe that Trump has no real objectives in any of this other than to look strong and dominant and keep attention focused on himself. So I don’t see the situation calming down as long as he remains in office. The people on the negotiating teams are responsible professionals, so some of the specific disagreements may be resolved. But even if that happens, Trump needs chaos to keep media attention on himself, so in all likelihood he’ll stir up something else.
Of course we do have a presidential election coming up late next year, and my sense is that the odds are against Trump being reelected. How that will impact trade policy of course depends on who the Democratic candidate ends up being, which we may not know for many months yet. Some of the leading candidates are more pro-trade than others. If Trump is reelected, which we certainly can’t rule out, it’s honestly difficult to find any grounds for optimism about our trade relations at all.
Democrats are also likely to make gains in Congress. This is not necessarily good news for trade policy since Democrats have historically been less committed to free trade than Republicans, and many still have protectionist instincts.
But still, at the very least a new administration and Congress are likely to mean calmer seas and steadier, more rational policies. The idea that European cars and auto parts are a security threat to the United States, for example, is frankly ridiculous, and I think any new Democratic administration will acknowledge that.
Viewed rationally, the United States and Europe have a wide range of common interests, not the least of which is preventing China from dominating the global agenda. Leading pro-trade Democrats in Congress have already expressed a desire to work more closely with allies in confronting China. To the extent that China should be seen as a threat, or at least a major challenge, the US and EU should be natural allies in containing it.
120 years ago the confident, aggressive new rising power on the international scene was Germany. We all know how badly things turned out when that situation wasn’t managed effectively. I’m convinced that significant tensions with China will remain under the next president, and that she or he will want to mend fences with our traditional allies in Europe and elsewhere.
That may very well include trying to revive something resembling TTIP, the Transatlantic Trade and Investment Partnership that was discussed during the Obama administration. At that point the ball will be back in Europe’s court. Most of the resistance to TTIP at that time came from the European side, and frankly I think you missed a great opportunity to secure a deal that would have brought a lot of benefits to both sides.
One thing that will not change under a Democratic administration is a strong American interest in including agriculture in US-EU trade negotiations. In fact we shouldn’t overlook the fact that alongside all the common interests between the US and Europe, there are also some very real differences. The United States has a growing trade deficit with the European Union. In 2018 US imports from the EU exceeded exports by over $168 billion, or nearly 53%, up from 28% in 2009.
Even in a best-case scenario, I’m not sure anyone on either side of the Atlantic has really quite grasped just how big a job we have ahead of us to rebuild trust and reform weakened institutions — all while simultaneously fundamentally restructuring our economies to meet the existential challenge of climate change and managing the new realities of China’s growing power and influence, as well as that of next-tier rising powers such as India.