U.S. Trade Deficit

In theory, there is a strong case for trade in services—specialization raises the productivity of all. Yet the actual data on U.S. trade in services tells a less appealing story. Far too much trade in high end services seems to be with low tax jurisdictions. I love the Irish, but there is something wrong when “Ireland“ is the United States’ leading export market for software services, business consulting services, and R&D services.

President Donald J. Trump heads to India at the end of the month— this week the White House formally announced the trip for February 24 and 25, with Ahmedabad, Gujarat, and New Delhi the main stops. Trump will help inaugurate a new stadium in Ahmedabad along with Prime Minister Narendra Modi, in a Houston-style event dubbed #KemChhoTrump (“How are you Trump?” in Gujarati). For weeks, press speculation has picked up where it left off last fall regarding progress toward some kind of a trade package, albeit still undetermined. India has one of the world’s largest economies and is a top ten trading partner for the United States—in fact, it’s number eight in goods and services, which means that the U.S.-India trade volume is now larger than that between the United States and France. But a growth in trade tensions has accompanied the growth in trade ties. In advance of the president’s visit, we put together a guide to some of the U.S.-India trade tensions that have persisted despite efforts to overcome them. Some of these issues are far more complex than they appear at first blush. The “Field Guide to U.S.-India Trade Tensions” provides references and links to primary documents for those interested—policy documents like U.S. National Trade Estimates, the Special 301 report, notices for hearings on the Generalized System of Preferences, Indian customs notifications, filings with the World Trade Organization, and others. Take a look here: A Field Guide to U.S.-India Trade Tensions Thank you to Erik Fliegauf for his assistance on the field guide, especially on the data and graphics.

India has become an important trading partner for the United States over the past two decades, but the relationship has been marred by long-standing disagreements on everything from dairy products to intellectual property rights protections.

Since the phase one trade deal between China and the United States was inked on 15 January, much of the commentary has focused on the overly ambitious targets for Chinese purchases of US goods. Critics charge that the deal amounts to ‘managed trade’ or ‘central planning’ that substitutes government diktats for market forces. The real danger of the new agreement, however, is that it replaces a trading system based largely on agreed rules with one based purely on negotiating muscle. The United States long championed a rules-based system, but is now discarding it in favour of a power-based system where the strong do what they can and the weak suffer what they must. Weakening rules put smaller economies—such as Canada, Australia, the ASEAN nations and Latin America—in an increasingly vulnerable position. Despite some happy talk of revitalising the World Trade Organization (WTO) at the gathering of business and government leaders at Davos on 20–24 January, prospects for shoring up multilateral rules look grim. In a world of bilateral negotiations, smaller countries will no longer have the protective umbrella of those rules, and will at best be able to cut unbalanced deals with the big players like the United States, China and the European Union. The phase one deal, negotiated after months of escalating tariffs by the United States and measured retaliation from China, is a glimpse of that future. It is long on measures that favour the United States but disadvantage other countries. The heart of the deal is a commitment by China to purchase an additional US$200 billion in imports from the United States over the next two years. China was unlikely to meet those targets, even without the recent disruption caused by the spread of the coronavirus, and the only way it can get close is by diverting purchases—buying US rather than Brazilian soybeans, for example, or US rather than Australian beef. Recourse for the affected countries will be limited. They can complain to the WTO that the China–US deal violates the core principle of non-discrimination in trade, but neither the United States nor China is likely to pay attention to a WTO ruling. The death of the appellate body—after the United States vetoed new appointments—effectively gives large countries a veto on WTO panel rulings. Any decision can now be blocked, and smaller countries cannot risk retaliating against bigger ones without the cover of a WTO decision. Reforms that would have benefitted all of China’s trading partners, such as limitations on Chinese industrial subsidies or restrictions on state-owned enterprises, have been left to phase two of the negotiations. But expectations for a second round are already low. US President Donald Trump indicated that any deal must wait until after the November US elections. Since China withstood tariffs on three-quarters of its exports to the United States without agreeing to such reforms, it is hard to see how the Trump administration can bring enough pressure in the future to force a change. Canada is a good case study in the dangers that await as international rules erode.  Hearings began on 20 January in Vancouver in the extradition trial of Meng Wanzhou, the Chief Financial Officer of the Chinese telecoms giant Huawei, who is wanted in the United States on allegations that the company violated US sanctions on Iran. Amid scrutiny of the phase one agreement, the hearings drew little notice. The Trump administration has scarcely paid attention despite Chinese retaliation against Canada, which has included jailing two Canadian citizens and cutting off US$2 billion in Canadian canola imports. Trump’s only public comment has been that he might intervene if he thinks it would help secure a better trade deal with China. The Huawei case in Canada shows just how vulnerable smaller countries have become. Meng was arrested in Vancouver over a year ago at the behest of US authorities, by a Canadian government determined to abide by the rules of its extradition treaty with the United States. In the past, China’s furious retaliation would have been met with a vigorous response from the United States in support of its Canadian ally. But the Trump administration has looked the other way, leaving Canada in the impossible position of choosing between meeting its obligation to the United States and weathering Chinese retaliation, or cutting a deal with China to release Meng and infuriating the United States. In the new global trade regime, every country will now face similar dilemmas. The United States is pressing other countries to stop all business with Huawei. They must decide whether to oblige and face Chinese retaliation, or refuse and anger the United States. Many countries, including Canada and the United Kingdom, are looking at new taxes on digital companies. But the United States has warned—using France as the example—hat it will slap unilateral sanctions on any country that tries. Without a clear and generally agreed upon set of global trade rules, every trade issue is now up for negotiation. In such negotiations, the bigger countries usually get their way. The phase one deal with China is a taste of things to come.

On Wednesday, January 15, Chinese Vice Premier Liu He and U.S. President Donald J. Trump will sign the “phase one” trade agreement that has been in the works since the March 22, 2018, determination under Section 301 that China’s policies and practices related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce. The Office of the United States Trade Representative (USTR) has indicated that the text of the phase one deal will be released to the public shortly after it has been signed on January 15. But given what we already know about the agreement, what should we be looking for when we finally get our hands on the text? Technology Transfer—USTR says the United States will be getting “an agreement by China to stop forcing or pressuring companies to transfer their technology to Chinese companies as a condition for obtaining market access or administrative approvals.” The trick here is that China already promised exactly this when it joined the World Trade Organization (WTO) in 2001. Section 7.3 of China’s Protocol of Accession (and binding paragraph 207 of its Working Party Report) says “any means of approval for importation . . . or investment” shall not be conditioned on . . . “the transfer of technology.” The focus here should be on what, if anything, is different this time. Financial Services—USTR says the agreement will “address” foreign equity limitations in financial services. We should be on the lookout for whether “address” means eliminate them, or something less than that. Also look at whether the agreement moves beyond the lifting of limits spelled out by China’s Securities Regulatory Commission on October 11, 2019, which permit 100 percent foreign ownership of futures companies as of January 1, 2020; of mutual fund management companies by April 1, 2020; and of securities companies by December 1, 2020. Currency—USTR says the agreement will require “high standards commitments to refrain from competitive devaluations and targeting of exchange rates.” While probably not part of the formal agreement, yesterday the United States rescinded its August 2019 declaration that China is a currency manipulator. The difficulty in enforcing trade agreement provisions affecting currency has always been, in part, the requirement to prove that interventions were done with the intent to gain an unfair trade advantage. Few governments have been willing to accuse others of the requisite malicious intent. Moreover, the WTO Agreements (General Agreement on Tariffs and Trade Article XV) require a finding from the International Monetary Fund (IMF) that a country has violated the provisions of the IMF’s Articles of Agreement. The phase one deal should be examined both for whether it requires a showing that China intervened in order to make its exports cheaper or its imports more expensive and whether the U.S. can decide for itself, without reference to the IMF or outside benchmarks, whether China has engaged in currency manipulation. Dispute Resolution—USTR says that the agreement will allow the United States to take “proportionate responsive actions that it deems appropriate” for disputes “related to the agreement.” This implies two things: (1) that the United States has the right to determine unilaterally that China has violated the agreement along with the appropriate amount of penalties (presumably additional tariffs imposed under Section 301’s authorization to modify any existing Section 301action); and (2) that these new dispute provisions will be used for violations of this agreement that do not also constitute a WTO violation. It appears that many of the provisions in the agreement may simply be reiterations of existing WTO rules. Be on the lookout for whether the agreement makes clear that violations that contravene the WTO rules or China’s Protocol of Accession to the WTO must be brought to the WTO for adjudication under the WTO’s Dispute Settlement Understanding. Increased Chinese Purchases—USTR says that China has committed over the next two years to import $200 billion more in U.S. goods and services than it imported in 2017. If those commitments specify a certain volume of specific goods that China will import only from the United States, such commitments might be viewed as a quota, in violation of China’s obligations under the WTO rules (GATT Article XI) not to utilize quantitative restrictions, and would violate China’s general most-favored-nation obligation (GATT Article I) to grant all WTO members the same advantage or privilege that it grants to the United States. Finally, worth noting is what we are not likely to see in this agreement—any provisions addressing the key structural problems with China—its extensive use of subsidies to prop up companies that ought to fail or to support companies that create significant overcapacity with goods flooding the world market, suppressing prices and displacing domestic production; any provisions addressing the growth in the size and reach of China’s State Owned Enterprises; or any provisions addressing the increasing levels of Communist Party control over the Chinese economy. It is also unlikely that this agreement will include provisions resolving the looming tech war between the U.S. and China over everything from artificial intelligence to 5G networks to national security related tech. Less clear is whether the agreement will spell out what China needs to do to get out from under the $350 billion in Section 301 tariffs that will remain in place even after this phase one agreement is signed.

Are the provisions of the Trump administration’s rewrite of the North American Free Trade Agreement (NAFTA)—set forth in the United States-Mexico-Canada Agreement (USMCA) enforceable? As written, the answer is no.

The trade war between the United States and China has entered a new and dangerous phase.

The Democratic candidate has laid out a comprehensive trade policy, but it speaks more to party activists than to voters.