Trade Update

May 12, 2020

By Michael Anderson

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Highlights

USMCA: As the USMCA implementation date of July 1stapproaches, officials and industry groups in all three countriesare pursuing delayed implementation for their respective autostakeholders. Section 232 Tariffs: The Commerce Department announcedtwo new section 232 investigations into imports – electricaltransformer components and mobile cranes - that couldthreaten national security, totaling seven such investigationssince President Trump entered the White House. In 2018 President Trump levied additional tariffs of 25% and 10% onsteel and aluminum imports, respectively, based onCommerce’s prior section 232 investigations for theseproducts.

U.S. - U.K.: Round one of U.S. – U.K. trade negotiations entera second week as both negotiating teams work to makeprogress out of the gate on all chapters of a comprehensiveagreement.

U.S. - China Trade: President Trump raised possibility ofpulling out of the China phase one deal or further raising tariffsif not satisfied with China’s progress on fulfilling itscommitments. Meanwhile Treasury Secretary Mnuchin andUSTR Lighthizer reported that China and the U.S. arecommitted to ensuring timely implementation of China’scommitments in phase one as both countries wrestle with theeconomic destruction from GOVID-19.

WTO: Fisheries talks at the WTO are paused due tocomplications over the global health crisis, signaling anothersetback in the WTO’s 2020 agenda. U.S. Senator Josh Hawleymeanwhile ratcheted up WTO criticisms initiating a jointresolution in Congress for U.S. withdrawal from theinternational organization based in Geneva, Switzerland.

USMCA

With USMCA’s effective date (July 1) approaching, autosector officials in all three countries are seeking delayedimplementation of the auto rules of origin. A Mexican industryofficial said, “The industry has been asking for more timebecause the uniform regulations need some time to bestudied, analyzed and incorporated.” The official noted thatCOVID-19 complications necessitate that countrygovernments provide automakers some flexibility. “Theagreement will enter into force on July 1 and we expect theuniform regulation to be published before that, but there isrequest[s] by the auto industry [in each country] to delay theentry into force of the auto rules of origin,” the official said.“My information is that the Mexican government is lookingpositively at that request and I hear the same from Canada.”To date, U.S. officials have not announced a decision ondelayed implementation.

Checking another USMCA box prior to the July 1st entry intoforce, President Trump issued an executive order establishingthe USMCA’s Interagency Labor Committee for Monitoringand Enforcement. According to executive order, thecommittee will “coordinate U.S. efforts to monitor and enforceenvironmental obligations consistent with title VIII of the Actand, with respect to Mexico and Canada, to carry outassessments of their environmental laws and policies, to carryout monitoring actions with respect to the implementation andmaintenance of their environmental obligations, and torequest enforcement actions.” Amb. Lighthizer and LaborSecretary Alexander Acosta will co-chair the Committee.Other committee members include representatives of theDepartments of State, Treasury, Agriculture, Commerce andHomeland Security, along with the U.S. Agency forInternational Development.

Section 232 Tariff Actions

The Commerce Department (Commerce) announced two newsection 232 investigations this past week regardingtransformer parts and mobile cranes that could lead toadditional tariffs. The first section 232 investigation coversimports of key electrical transformer components. Citing“national security concerns” outlined in the statute, CommerceSecretary Ross said in a statement, “The Department ofCommerce will conduct a thorough, fair, and transparentreview to determine the effects on the national security fromimports of laminations for stacked cores for incorporation intotransformers, stacked and wound cores for incorporation intotransformers, electrical transformers, and transformerregulators.” The transformer components are manufacturedfrom grain oriented electrical steel (GOES) and Canada andMexico were the leading import sources for the componentsin 2019.

Wilbur Ross, Commerce Secretary

The second 232 investigation covers mobile cranes and isbased in part on a previously filed complaint filed by TheMaitowoc Company, Inc., based in Wisconsin, asserting asurge in imports of low-priced mobile cranes hasdisadvantaged domestic companies. Maitowoc’s complaintsubmitted last December listed Germany, Austria and Japanas countries of concern. In announcing the investigationSecretary Ross stated, “We will conduct this reviewthoroughly and expeditiously.” Ross added, “This investigationwill help determine whether mobile cranes are being importedin such quantities or under such circumstances as to threatento impair U.S. national security.” Commerce noted that mobilecranes are critical in national defense applications, as well asin key infrastructure sectors.

As outlined in the statute, Commerce will have 270 days tocomplete the investigation and submit remedyrecommendations to President Trump if it finds that theimports threaten to impair national security. President Trumpthen has 90 days to impose restrictions suggested byCommerce or choose another policy option. After making thedecision, the President must implement actions within 15days.

Source: CRS graphic based on 19 U.S.C. §1862.

The Trump Administration has now initiated seveninvestigations under the section 232 provision regardingthreat to national security over imported products. The firstinvestigations resulted in President Trump imposing tariffs of25% and 10% on imports of steel and aluminum, respectively,based on Commerce’s Section 232 investigation that foundsuch imports were a threat to national security. Shortlythereafter, a product-exclusion process “limited to theindividual or organization that submitted the specific exclusionrequest, unless Commerce approves a broader application ofthe product-based exclusion request to apply to additionalimporters,” was established as downstream steel andaluminum consuming industries highlighted the increasedcost and burden stemming from the higher tariffs.

COVID-19 Developments

In March U.S. exports of goods and services plunged furtherreflecting the implosion of the global economy and rapidlyshrinking trade flows. The 9.6% decline in exports wassharpest one-month drop on record. Imports declined 6.2%percent resulting in a $44.4 billion trade deficit, wider than the$39.8 billion level in February.

China Trade

Phase One Agreement

President Donald Trump threatened again last Friday to pullout of the phase one trade deal with China if he’s not satisfiedwith China’s progress upholding the deal. “I’m very torn,”Trump said, adding that he had "not decided" whether tomaintain the deal. The remarks came less than 12 hours afterAmb. Lighthizer and Treasury Secretary Steven Mnuchinspoke with Chinese Vice Premier Liu He and released a jointstatement saying they were optimistic China would meet itspurchase commitments under the deal. The two cabinetofficials said, “Both sides agreed that good progress is beingmade on creating the governmental infrastructures necessaryto make the agreement a success.” They emphasized thatChinese officials "also agreed that in spite of the currentglobal health emergency, both countries fully expect to meettheir obligations under the agreement in a timely manner.”

Earlier the President alluded to additional tariff measures in adaily CVID-19 briefing saying, “we’re going to see.” But ifChina does not live up to the agreement, the President saidhe would terminate it and “do what I can do better thananybody,” a likely reference to more tariffs on imports fromChina.

Under the phase one deal China committed to increasepurchases of U.S. goods and services by $200 billion(agriculture, manufactured goods, energy and services)above 2017 levels over the next two years. That includes$76.7 billion more in U.S. exports this year and $123.3 billionmore in 2021. Official U.S. statistics for March trade flowsreleased last week revealed China’s purchases of U.S. goodsare below 2017 levels by Regarding agriculture purchases,China has committed to buy additional purchases of U.S.agriculture products totaling $32 billion over two years, underthe phase one trade deal. That would include $12.5 billionabove the corresponding 2017 baseline of $24 billion in 2020and $19.5 billion above the baseline in 2021.

Despite the uncertainty of China fulfilling its agriculturepurchase commitments under phase one, some products areexperiencing increased demand in China. Last week Chinacommitted to purchase 686,000 metric tons of corn, with371,000 tons of it for delivery in the 2019-20 marketing yearand the rest — 315,000 tons — in 2020-21.

An analysis by the American Farm Bureau Federation (FarmBureau) outlines the expected additional purchases in 2020and 2021 by China as part of the phase one deal. Specifically, China agreed to purchase “no less than $12.5billion in U.S. agricultural products during calendar year 2020and no less than $19.5 billion worth of U.S. farm and ranchgoods in calendar year 2021, on top of a 2017 baselineamount anecdotally expected to be $24 billion.” Over the firsttwo years of the deal China is expected to purchase $80billion in agriculture products with the balance in increasedimports of U.S. manufactured goods, energy products, andservices.

Section 301 Tariffs

In the past few weeks President Trump has raised the specterof additional tariffs as a response to what the White Housesays is China’s mishandling of the coronavirus. Referring tothe trade deal Trump said, “we’re going to see.” But if Chinadoes not live up to the agreement, the President said hewould terminate it and “do what I can do better than anybody,”a likely reference to additional tariffs on imported productsfrom China.

Speaking to reporters earlier, Trump said, “It’s certainly anoption,” “So we’re going to see what happens. A lot of thingsare happening with respect to China,” he said. “We’re nothappy, obviously, with what happened. This is a badsituation.”

In response to President Trump’s threats to again imposetariffs on China owing to its management of the coronavirusleading to the current global pandemic, a Chinesespokesperson warned that additional duties on Chinesegoods would only harm the U.S. when the two countriesshould instead be working together. “Regarding the issue oftariffs, I think the facts have proved that the weapon of tariffsis not easy to use,” a Ministry of Foreign Affairs spokeswomansaid. “It hurts both opponents and yourself. It is not inanyone’s interest to fight a trade war. Especially in the currentsituation, all parties should cooperate instead of seeking touse tariffs as weapons and sticks to coerce other countries.”

Seasonal Produce

No significant developments since Rep. Ted Yoho sent aletter to President Trump calling for a “…force majeuremotion to stop the importation of all Mexican, CentralAmerican, and South American food products during thispandemic…”. In the letter Rep. Yoho argued thatextraordinary measures are necessary to save America’sfood producers who face a “glut” of products in the market. The letter emphasized that the import ban “should includefresh fruit, vegetable, dairy, and meat products."

In a January 9, 2019 letter to the Florida congressionaldelegation Amb. Lighthizer outlined the administration’s planto review and determine options regarding “trade-distortingpolicies that may be contributing to unfair pricing in the U.S.market for seasonal and perishable products and to assessthe impact of those policies on U.S. producers.” The letternotes that within 60 days after “entry-into- force” of theUSMCA, the USTR will “implement effective and timelyremedies necessary to address any trade distorting policies”affecting U.S. growers. Additionally, within 90 days, theDepartment of Commerce, U.S. Department of Agricultureand USTR will have hearings in Florida and Georgia to heartestimony from growers. According to USTR, “At thehearings, officials from the federal agencies will hear frominterested persons on how the Trump Administration cansupport these producers and redress any unfair harm.”

Observers anticipate USTR announcing rescheduled fieldhearings when challenges under COVID-19 issues aremanageable or conducive to a hearing. Prior to suspensionof the hearings, Mexican government officials warned thecountry may be forced to react should the U.S. imposerestrictions on seasonal produce trade. MexicanUndersecretary for North America Jesús Seade said Mexicowould use USMCA’s dispute settlement mechanism as wellas direct measures “to start.” He emphasized that Mexicowould “probably take action of a similar commercialmagnitude on appropriate sectors, it could be agriculturalsectors.” Seade affirmed that “if anything is inconsistent withour commitments, we will have to respond.”

U.S. - Japan Trade Agreement

Potential U.S.-Japan phase two trade talks remain beholdento COVID-19. Several observes have noted that eachgovernment is rightly focusing on coronavirus management,and the odds of talks getting off to a fast start appearingincreasingly unlikely as time passes and the U.S.presidential election approaches. Prior to the outbreak ofCOVID-19, commencement of negotiations on a phase twoor a comprehensive trade deal were expected no earlierthan May according to several sources.

U.S. - EU Trade Agreement

EU Trade Commissioner Phil Hogan confirmed that EU andU.S. officials are in “constant contact” and the environmentis ripe not only to coordinate a response to the coronaviruseconomic fallout, but cooperation in trade areas. Hoganemphasized the importance of the U.S. and EU relationshipand working together to tackle current challenges in bothcountries. As examples, Hogan cited WTO reform, digitaltrade and the facilitation of trade in medical supplies. Henoted the lack of engagement on WTO reform, particularly indispute settlement, by the U.S. Regarding the recenttransatlantic communications he said, “I think this gives usan opportunity in this crisis to revive our transatlanticrelationship between the EU and the United States and put iton a sounder footing,” Hogan said. “I hope that will be thecase taken by the United States.” Hogan confirmed sendinga letter to Amb. Lighthizer to “identify some leadingprinciples” for the U.S. and EU in working together, notingthe two economies are a “central artery” of world trade. Headded he was “looking forward” to a response fromLighthizer.

Phil Hogan, EU Trade Commissioner

Hogan’s remarks came the same week the U.S. notified theWTO "that it has fully complied in the dispute brought by theEuropean Union” against illegal subsidies for Boeing aircraftproduction, according to a press release by USTR. Amb.Lighthizer in the statement noted, “With Washington State’srepeal of this relatively minor tax reduction, the United Stateshas fully implemented the WTO’s recommendation, endingthis dispute.” “This step ensures that there is no valid basisfor the EU to retaliate against any U.S. goods. In the counter-suit on U.S. civil aircraft produced by Boeing, the EU isseeking retaliation for subsidies of $10 billion per year, whichUSTR reports the majority of that amount is attributable tothe Washington B&O tax rate reduction that Washington hasnow repealed. EU officials have published a preliminary list ofretaliatory tariffs on U.S. products as the final damage awardis expected in the next month or so from a WTO arbitrator.The impact of the USTR’s claim of compliance and possibleend to the dispute on the arbitration award decision is unclear.

In response to USTR’s statement, the European Commissionmaintained it can still retaliate with tariffs against subsidies forBoeing, arguing the U.S. has not completely removed itssubsidies for the aircraft maker. An EU spokesperson said,we are “still examining the impact of the legislative actionconcerning the Washington State B&O tax,” yet “the rulings inthis dispute cover a number of additional measures where theU.S. remains non-compliant, including NASA and Departmentof Defense Research and Development measures and certainState and local measures.”

Last October a WTO panel announced a damage award of$25 billion in the U.S. case on illegal launch aid for Airbus’civil aircraft program, clearing the way for the TrumpAdministration to impose duties on EU imports in the 15-yearlong trade dispute. In the most recent action on the Airbusdispute, the U.S. raised the tariff on EU aircrafts to 15%according to a previous deadline announced by PresidentTrump. EU officials continue to emphasize the importance ofreaching a larger understanding to end the 15-year aircraftdispute. The arbitrator’s ruling on a damage amount in the EUcounter-challenge on U.S. subsidies for Boeing is anticipatedfor later May or early June, but it remains unclear how theglobal health crisis will impact that timeline.

U.S. - U.K. Trade Agreement

At the launch of U.S.-U.K. trade talks, officials on both sidesexpressed ambitions for robust outcomes in acomprehensive trade deal. In a joint statement last weekofficials said they will be “engaging in discussions over thenext two weeks in nearly 30 different negotiating groupscovering all aspects of a comprehensive trade agreement.”“Both parties agree that a Free Trade Agreement wouldcontribute to the long-term health of our economies, which isvitally important as we recover from the challenges posed byCovid-19,” the statement said. Amb. Lighthizer said the U.S.and U.K. plan to negotiate an “ambitious and high-standardtrade agreement” that will be “consistent with U.S. prioritiesand the negotiating objectives established by Congress.”

Liz Truss, U.K. Secretary of State for International Tradecalled for an “ambitious” agreement and one that would helpboth nations “bounce back from the economic challengeposed by coronavirus.” “Both governments are committed tomaintaining high levels of health, safety, and environmentalprotection that will serve as a model free trade agreementfor the world,” according to the statement.

As negotiations launched, Senate Finance CommitteeChairman Chuck Grassley said a U.S.-UK deal shouldremove U.K. restrictions on genetically modified food andhormone-treated beef. Grassley said, “I would expect tohave a much more liberal negotiations and more favorablefree trade for American agriculture vis-a-vis the UK than wewould get from the EU,” He further noted that a strong dealwith the UK could improve the U.S. negotiating position intalks with the EU stating, “But I would also expect our goalthere with the UK [to be] so we could get a better deal whenwe negotiate with the EU.” Grassley added, “It is a stickyarea and all I’m hoping to do is if we get a good deal with theUK on agriculture, it’s going to embarrass Europe.”

With round one of U.S.- U.K. trade talks underway, areminder of the U.K.’s prior estimates on economic gainsfrom a U.S. free trade agreement as published in a report bythe U.K.’s Department of International Trade (DIT). DITestimates a U.S. FTA would increase UK GDP in the longrun by around 0.07% (within a range of between 0.02% and0.15%) or 0.16% (between 0.05% and 0.36%) underscenario 1 and scenario 2, respectively. This is equivalent toan increase of £1.6 billion or £3.4 billion compared to its2018 level. DIT estimates that all UK sectors would seeincreased output in the long run.

U.S.-Kenya Trade Developments

The Congressional Research Service (CRS) released a “InFocus” brief on the pending U.S. – Kenya Trade talks. Thetwo-page brief summarizes the present economic and tradeties, present tariffs and barriers for U.S. exporters in Kenya,and key issues for the trade talks and Congress.

USTR could release its negotiating objectives on the U.S.-Kenya free trade talks in the next few weeks according to apreviously stated target date of June 15 to commence formalnegotiations. In March USTR formally notified Congress ofits intent to undertake trade talks with Kenya. The USTRletter(s) said that the U.S. will begin negotiations "as soon aspracticable," but not before 90 days from now, or June 15.” The letter also affirmed that USTR will publish its formalnegotiating objectives at least 30 days before talks begin, arequirement under Trade Promotion Authority (TPA), andUSTR committed to working "closely and transparently" withCongress throughout the process.

According to a USTR fact sheet, Kenya is the United States’98th-largest trading partner in goods, with $1 billion in two-way trade in 2018. Major U.S. imports include apparel, treenuts, essential oils, and coffee, while Kenya’s major importsinclude aircraft, machinery and agricultural goods.

U.S. - Brazil Trade Developments

No significant updates on U.S. -Brazil talks for a mini-tradedeal since the White House announced an acceleratedtimeline. Last month the White House announced that theU.S. and Brazil are moving forward to accelerate bilateraltrade dialogue under the Brazil-U.S. Commission onEconomic and Trade Relations with the goal of concludingan agreement on trade rules and transparency, includingtrade facilitation and good regulatory practices be the end ofthis year. During a recent high-level discussion betweenU.S. and Brazilian trade officials, both sides committed toengage in domestic consultations to glean stakeholder inputon how best to expand the current trade and economicbilateral relationship. The accelerated talks stem from recent communicationsbetween Amb. Lighthizer and Brazilian Minister of ForeignAffairs Ernesto Araújo and other senior officials. The twoministers discussed potential steps to deepen the economicpartnership between the two countries under the currentAgreement on Trade and Economic Cooperation (ATEC).The call between Amb. Lighthizer and Minister Araújofollows on the recent meeting between Presidents Trumpand Bolsonaro in Florida where the leaders agreed toaggressively pursue trade talks.

U.S. - India Trade Developments

No significant update on U.S. -India trade talks as bothcountries are focused on economic recovery and arrestingthe spread of the coronavirus. President Trump and PrimeMinister Modi announced in February they had "agreed toinitiate negotiations for a bigger deal," as earlier ambitionsfor a quick limited deal evaporated. Trump stated the twosides "have made tremendous progress on acomprehensive trade agreement." Trump said that a dealcould be achieved toward the end of the year but offeredthat if there is no trade agreement "we will do somethingelse that will be very satisfactory."

A primary motivation for India in the trade deal is restorationof India’s GSP benefits, valued at approximately $6.4 billion.The U.S. earlier revoked India’s GSP benefits and is callingfor reciprocal market access in India for agriculture products,industrial goods, and services in order to restore GSP.

Suspension Agreements

Sugar Suspension Agreement

The Commerce Department recently announcedcontinuation of the current antidumping and countervailing(AD/CVD) duty orders on sugar imports from Mexico. In theFederal Register notice Commerce indicated it hadcompleted its portion of the Sunset Review (i.e. 5-yearreview) which essentially ensures continuation of the currentsugar suspension agreement. Earlier in the year the U.S.International Trade Commission voted to maintain theexisting AD/CVD orders on sugar imports on Mexico toprevent recurrence of injury. The five-year (sunset) review isrequired by the Uruguay Round Agreements Act. The nextSunset investigation occurs in 2025.

General Trade/WTO Reform

The WTO fisheries negotiations were put on pause last week,dealing another setback to the WTO agenda this year as theorganization adapts to a collapsing global economy,cancellation of the 12th Ministerial, and increasingprotectionism from members brought on by the globalhealthcare crisis. Chair of the fisher negotiations, ColombianWTO Ambassador Santiago Wills, said based on hisconsultations with members and views presented at theheads-of-delegations meeting last month, he concluded thatmembers were not prepared to engage in virtual and writtendiscussions. Amb. Wills indicated he would further assess thesituation and the lifting of government coronavirus restrictionswere a complicating factor. Before the coronavirus outbreak,the fisheries talks were expected to conclude in 2020, inaccordance with United Nation’s Sustainable DevelopmentGoals.

After penning a controversial op-ed in the New York Timescalling for the disbandment of the WTO, Senator Josh Hawleyelevated his critique of the WTO issuing a joint resolution forU.S. withdrawal from the Geneva-based international tradeinstitution. Hawley’s attacks echo other complaints on China’sbehavior and several global institutions’ handling of thecoronavirus. Sen. Hawley blames the WTO for empoweringChina’s state-rum economic model, frequently cited as theleading culprit of the U.S. manufacturing demise, ballooningtrade deficits, and geopolitical shift to China, particularly inAsia, at the expense of American interests. Hawley contends,“International organizations like the WTO have enabled therise of China and benefited elites around the globe whilehollowing out American industry, from small towns to once-thriving urban centers.”

Josh Hawley, Senator

Sen. Hawley’s actions drew a quick response from SenateFinance Chairman Chuck Grassley who said he supportsWTO reform, but “withdrawing from the WTO would onlyleave a vacuum for China to fill and diminish America’sposition of strength.” Several critics of the withdrawalapproach argue such action would harm U.S. industry andagriculture, releasing countries that remain in the WTO wouldnot be required to offer the U.S. lower tariffs or abide by thetrade rules they agreed to as WTO members. The last timeCongress voted on WTO withdrawal was in 2005, when theHouse overwhelming defeated a withdrawal resolution 338-86. The Senate has never voted on withdrawal accordingPolitico. Both as a presidential candidate and President,Trump has threatened to withdraw the U.S. from the WTO, yetto date, USTR’s repeated calls for WTO reform anddissolution of the Appellate Body have stopped short ofsignaling the withdrawal option.

For over a decade, the U.S. has complained about thefailures and overreach of the WTO’s appellate body (AB)system, blocking the appointment of new panel members tothe AB leading to dissolution of the body on December 10,2019. The Trump Administration has consistently rejectedseveral reform proposals by the EU, China and other WTOmembers as insufficient and only a superficial response to adeeper systemic problem. Earlier in the year, USTRreleased a detailed 174-page report inventorying thecomplaints and failures of the WTO’s Appellate Body, butoffered no solutions or reform proposals. As stated in thereport, "The purpose of this report is not to propose solutionsto the problems facing the WTO dispute settlement system.Rather, its purpose is to provide a thorough examination ofthe Appellate Body's failure to comply with the WTOAgreements." USTR’s statement continued, “The Reportdemonstrates the Appellate Body’s persistent failure to followbasic WTO rules and highlights several examples of how theAppellate Body has altered WTO Members’ rights andobligations through erroneous interpretations of WTOagreements.”

General Trade/WTO Reform

For the second month in a row the Ag EconomyBarometer dropped sharply, declining 25 points in April below100 and approaching the lowest point recorded since April2016. The record high reached in February has evaporatedand more, with the index tanking 72 points the past twomonths. Rapidly falling prices for major commodities andwidening concerns and uncertainty regarding the impact ofCOVID-19 on farmers were primary factors in reversal offarmer sentiment.

According to the administrators of the survey, PurdueUniversity – CME Group, farmer concerns with COVID-19were paramount. “Farmers’ pessimism was motivated, in part,by concerns about the impact coronavirus is having on theirfarms’ profitability and their farming operations. Two-thirds offarmers in this month’s survey said they were very worried(39%) or fairly worried (28%) about the impact of coronaviruson their farms’ profitability this year. Over half (54%) of thefarmers responding said they anticipate applying for one ofthe federal government’s COVID-19 related financialassistance programs.”

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