Originally published by the Journal of Commerce in August 2017.
We are now a few months (almost 7) into Mr. Trump’s Presidency and it is still not clear – what is the Administration’s trade policy? The general press is rife with stories about the warring factions within the Administration – those who xenophobically want to turn inward and those who view issues through a global prism. There are, so far, only a handful of tangible signals to point to – withdrawal from the TransPacific Partnership; notice to Congress, Mexico and Canada to renegotiate NAFTA; withdrawal from the Paris Climate Accord; and this weekend’s U.S. led passage (jointly with China and Russia) of additional sanctions against North Korea. Let’s be honest – this is too small a sample to be able to reliably read the tea leaves, even if you include the proposed cut in budget and redirection for the Dept. of Commerce, and the proposed cut in budget and staff at the Dept. of State!
The U.N. sanctions against North Korea would not have been possible if China and Russia did not view further action in their own self-interest. Typically one or the other country vetoes U.S. action with which it disagrees. Resolution 2371 (2017) targets the main exports giving hard currency to North Korea – including seafood, lead ore, coal, iron, iron ore and lead. The resolution also calls on member countries to not issue any additional work permits to North Korean workers. Given the efforts of that regime to build nuclear capability, this vote by all was one focused on national security but also world security. It cannot be seen as a harbinger of President Trump’s trade policy, except when viewed as building on the recently enacted “Countering America’s Adversaries Through Sanctions Act”, but then that bill was passed in both Congressional houses by a veto proof majority. It enhances the sanctions imposed on Russia, Iran and North Korea, but does so in a way that makes trade with China more challenging . More details can be found here: https://blogmsk.com/2017/08/02/trading-with-china-new-reasons-to-be-wary/. Companies will need to upgrade their compliance programs to root out any North Korean origin inputs in goods originating in China and imported into the U.S., but also resales by Chinese companies to North Korean buyers of U.S. exports. Due to the international nature of these latest sanctions, the onus regarding North Korea applies equally to all countries, but that does not make it any easier for American companies to conduct their due diligence.
The exact text of the resolution was not released as we went to press, but the U.N. website indicates Saturday’s action also prohibits the opening of new joint ventures or cooperative entities or the expansion of existing joint ventures through additional investments unless approved by the U.N. Nine individuals and four entities were subjected to a travel ban and asset freeze already in place, plus a request to the International Criminal Police Organization (INTERPOL) to issue special notices regarding the named individuals. The purpose of the special notice is to notify law enforcement in each country these individuals are subject to a UN sanction which permits local law enforcement to take action in accord with each country’s laws.
Also included in the U.N. resolution is to identify any vessels involved in evading prior U.N. sanctions. The U.N. also encouraged a resumption of the six party talks. Those involved China, Japan, South Korea, Russia, North Korea and the United States and are aimed at: “… a verifiable and peaceful denuclearization of the Korean Peninsula”.
In a Wall Street Journal® opinion column published on August 1, 2017, Commerce Secretary Wilbur Ross took issue with those who claim the approach of the Trump Administration is protectionism. Particularly mentioned were the actions of China and the EU regarding tariff and non-tariff barriers. While admitting the trading rules and rates of duty in the EU are quite different from those in China, Mr. Ross (no relation) nonetheless took issue with the “onerous and opaque procedures for registering and gaining certification for imports, unscientific sanitary rules, especially with regard to agricultural goods; requirements that companies build local factories; and forced technology transfers…” Mr. Ross also mentioned both blocs as “bankroll[ing] their exports through grants, low-cost loans, energy subsidies , special value-added tax refunds, and below-market real-estate sales and leases, among other means”.
While everyone of Mr. Ross’ objections is valid, the rules in other countries are typically quite opaque and so far less open and even handed, his argument overlooks the U.S. has taken similar measures. The four most protected industries in the U.S. are steel, auto and auto parts, textiles and wearing apparel and footwear. They were for years protected by high tariffs, quotas and complicated rules of origin. They still enjoy a degree of protectionism today with complex rules of origin and even some high rates of duty. Only the quotas are gone. These industries are also in many ways the least competitive ones in the U.S. In reality, the major players in each of these industries and may other industries produce primarily outside the U.S. The notable exception is auto and auto parts, whose companies, in today’s market are primarily foreign, although the Big 3 auto makers are significant, but even they are able to maintain their strength, in part, relying on foreign production and foreign sales.
Each of these industries – steel, auto and auto parts, textiles and wearing apparel and footwear – has undergone rapid and dramatic change by expanding onto the global stage. The U.S. also enjoys remarkably low duty rates. The average duty rate in the U.S. is still quoted to be 2.5%. No one is suggesting that duty rates should go through the roof! No one is suggesting that Ex-Im Bank and similar loans should not be done away with. Local content requirements can be valuable, but certainly not to the extent that has been required by some trading partners. The stories are legend about requirements in China for local partners (which vary by province) where the office space is large but unoccupied simply to comply with certain local content and hire requirements. The question is how do you get the attention of other countries to change their rules?
One point where Mr. Ross is correct is the World Trade Organization does need to change. He states: “The WTO should protect free and fair trade among nations, not attack those trade remedies necessary to ensure a legal playing field…” The challenge to getting any institution to change is, like so many other institutions, domestic and international, the WTO operates as a democracy. As such, its 164 members each vote in their own self-interest, and let’s be honest, that includes the U.S. Therefore, the question for Mr. Ross and the entire Trump Administration is how are you going convince WTO members to change?
Perhaps Friday’s expected announcement regarding trade with China and the supposed 301 investigation for intellectual property (and perhaps other ) alleged violations which may be initiated, might tell us something once the 301 investigation is concluded and the anticipated trade sanctions on China re imposed. However, to this point, it appears the answer is to seek ways in which to “make American great again”! Regretfully, in these admittedly few months of the new Administration, it is still not clear what that really means. Stay tuned for what follows!