An update on a big week in international trade and CFIUS reform. As always, you can sign up for the Kabealo PLLC mailing list here.
As the dust settles: tariffs in action. One silver lining to be found in the U.S.’s preemptive strike on global free trade is that the rest of the world appears to remain committed to a rules-based system of trade. They have declined to cut backroom, unilateral deals with the U.S. and are adhering to the rules established by the WTO and other trade pacts. That is not to say they’re not angry. They’re quite angry, using the strongest possible terms in diplomat-speak to condemn the U.S. actions. Canadian prime minister Justin Trudeau called the national security justification for steel and aluminum tariffs against Canada “insulting and unacceptable,” while China has said that if tariffs or other restrictions on China move forward, it will not follow through on the various commitments it has made during negotiations. Separately, as we’ve discussed so many times before, China is seizing the opportunity to win over our former allies.
The enemies kept closer. At home, some Republicans, along with Democrats, moved to pass legislation to rein in Trump’s ability to unilaterally impose tariffs. Republicans (other than Mitt Romney) are worrying about significant losses in both houses in November. Retiring Senator Bob Corker unveiled a bipartisan bill to provide congress a veto right when the president seeks to impose tariffs under national security auspices. He introduced the bill over President Trump’s personal objection. Senate Majority Leader Mitch McConnell quickly spiked the idea, but the question of midterm elections during a trade war is looming large in Washington. It won’t come to pass, but it’s hard to imagine that an effort by Congress to give itself a veto right over executive branch national security decisions would ever pass muster with the courts. That’s exactly why the blending of trade and national security issues is so fraught—the executive branch has always had broad discretion to take action where it has identified national security threats to the U.S., but turning the whole U.S. economy into national security fodder is a carte blanche for executive power that would abrogate the entire concept of checks and balances.
Kiss the ring: the power of heartland agriculture. Some predict Trump will cave on the trade war specifically out of fears of midterm losses, while the rest of the world targets Trump’s heartland base for retaliatory tariffs. Indeed, just this week, Trump inked a deal to save Chinese telecom giant ZTE after the U.S. Department of Commerce almost killed its business by banning its access to U.S. component pieces. Trump became personally involved to reverse his own administration’s decision, citing his concern of Chinese job losses, but it appears Trump’s intervention helped to knock loose Chinese regulatory approval of Qualcomm’s acquisition of NXP—a deal largely seen as necessary for Qualcomm’s survival, which in turn is seen as necessary for the U.S.’s continued leadership in 5G telecommunications networking technology.
Speaking of ZTE, here’s an interesting piece on why Beijing is so aggressively pursuing a domestic semiconductor industry. It’s by the crack team over at Marketplace, who are known to interview only the best sources.
Que-bickering in Canada. Notwithstanding predictions that Trump will back down prior to the midterm elections, he’s in no mood to relent just yet. The president is meeting with the heads of state of six world economic leaders (Canada, France, Germany, UK, Italy and Japan, with EU representatives allowed to attend as well) today in Quebec at an annual G-7 meeting. The intent of the meeting is to discuss various aspects of global trade, but the outcome will be a 6-versus-1 scolding that the U.S. is in violation of international laws and generally is threatening the global trade order. Indeed, a meeting of global finance chiefs leading into the Quebec summit resulted in the other six nations announcing their “unanimous concern and disappointment” regarding recent U.S. actions—an incredibly rare unanimous rebuke of the U.S. in a global trade forum. While such a posture may reflect their honest beliefs, one has to wonder about the strategic wisdom here. When was the last time this President, when backed into a corner, admitted he may have gone too far and reverted to a more reasonable course of action?
Phone a different friend! Leading into the forum, French president Emmanuel Macron took to Twitter to declare that, while the U.S. may not mind isolating itself, the rest of the G-7 attendees do not mind signing a six-country declaration in solidarity against the United States. President Trump ignored the missive. Kidding—he responded in kind several times then, in what could be seen as a bizarre raising of the stakes, called for Russia to be re-admitted to the meetings. Russia was kicked out of the meetings when it went to war against Ukraine in 2014 and hasn’t done much to endear itself to current members since. In fairness, the question of how to deal with Russia was on the agenda for the meeting, so it was a natural topic for discussion with reporters at the outset. Even so, there are easier and more politically strategic ways to avoid being isolated at a world economic summit, and calling for Russia’s re-admittance without any corrective behaviors on Russia’s part is an incomprehensible failure to use leverage available to the President.
A lipstickless pig, a.k.a. a preemptive toss of the towel. The outcome even before the G-7 meeting kicked off appeared to be doomed to failure. The U.S. announced that President Trump would leave the forum early—before sessions on climate change and oceans, and before the final photo session, news conference and joint statement by world leaders. While these may sound superficial, they are the fundamentals of diplomacy, and this isolation of the U.S. on the world stage—at the U.S.’s invitation—is a stark departure from the last 70 years of U.S. global leadership.
One more happy thought. President Trump will ride his G-7 momentum into a Tuesday summit with North Korean dictator and fellow nuclear power Kim Jong-Un—a meeting Trump has declined to prepare for because the meeting is “about attitude.”
The loneliest man: Wilbur Ross in China. Secretary of Commerce Wilbur Ross met in China to discuss our trade dispute there. It appears, incredibly, that the main topic on his agenda will be asking China to buy more U.S. goods to reduce our trade deficit with them. China delivered a stern message going into the meeting, saying that all progress the countries had made in trade negotiations would be revoked if U.S. tariffs or other sanctions against China go into effect.
An aside on deficits. We’ve discussed before what a terrible metric trade deficits are in measuring the overall quality of a trade relationship. As we previously noted, it’s very easy to imagine a system where you buy raw materials from Country A, process them into high-end goods, then sell them to other countries. Are you “losing” to Country A just because you buy more from it than it buys from you? Separately, consider the fact that America is the richest and most productive nation in the history of human civilization. Doesn’t that indicate that America would buy more than other, less-rich nations? Compounding that issue, Americans save far less of a percentage of their incomes than people of other nations. So we make more, and we spend more. Of course we’re going to buy more from other countries than they do from us. But here’s what’s driving our trade policy. There are so many crucial issues to solve in global trade. Deficits aren’t one of them. Unfair trade practices are, but attacking the deficits is a classic case of treatment over prevention: very much like curing mosquito bites by scratching them rather than using bug spray and getting rid of stagnant pools of water (that’s a summer in DC analogy).
A few quick hits on CFIUS:
Canadians buying cobalt mines in the U.S.? Sure.
The Chinese government owning ports in the U.S.? Not so fast. We’ve looked at this one before, and it appears to still be quite contentious. That said, one of the truly remarkable aspects of the CFIUS process is how well-insulated from political meddling it typically is. A letter from a trade group or a lobby tends not to alter the outcome of a particular case.
Experts weigh in (and in) on CFIUS reform. Treasury Secretary Steven Mnuchin has said that he views CFIUS reform legislation, rather than separate unilateral executive action, as the preferred avenue to clamp down on investment by China.
And finally, an underreported headline that actually matters, bigly: There are huge vulnerabilities in our election voting systems, our emergency response systems, our automobiles, our global credit card systems and more. This fall, an important question to ask all candidates what they have done to strengthen our critical infrastructure systems.