90-Day Trade Detente for United States and China
The United States and China are now attempting to settle their differences on trade, after reaching a 90-day detente at the Trump-Xi meeting earlier this month. Despite some Chinese concessions since the detente began, the prospects of China making enough large-scale changes to its economic model to satisfy U.S. demands is likely illusive, especially under such a short timeframe. U.S. Trade Representative Robert Lighthizer — now designated as the American lead on U.S.-China talks — said in a rare TV interview that China must make structural changes to its economy that are “verifiable and monitored,” as opposed to “vague promises like we’ve seen over the last 25 years.” In accordance with the detente, the Trump Administration has now officially delayed the implementation of higher tariffs from January 1 to March 2, which Lighthizer called a “hard deadline.” Further talks are expected in January.
Of importance to the German automakers, which account for two-thirds of U.S. car exports to China, China will temporarily reduce its tariff on U.S. auto imports from 40 percent to 15 percent — beginning January 1 and ending April 1. This impacts Daimler AG and BMW AG in particular. BMW shipped nearly 107,000 cars from South Carolina to China last year. Daimler announced Monday that it will pass the tariff discount along to customers during the 90-day window.
China has also resumed some purchases of U.S. agricultural products, which it had suspended in July. China has purchased some 3 million tons of soybeans over the last two weeks, and may resume purchasing corn in January. These purchases, however, do not remotely make up for the lost sales since the trade war began, and on Monday, the U.S. Secretary of Agriculture announced a second round of assistance payments to farmers from its $12 “Market Facilitation Program.” Despite China’s targeting of Trump’s rural base, Trump’s support among rural voters remains high.
China also is also reframing its “Made in China 2025” industrial policy, which relies on subsidies and “forced technology transfer” to position China as the world’s technological leader. China also dropped it from a list of directives for local governments to implement. These changes, however, will likely be too superficial to satisfy U.S. demands, particularly as U.S. national-security experts continue to view Chinese cyber-espionage as a severe risk.
The talks have been complicated by the United States’ desire to extradite and prosecute Meng Wanzhou of Huawei, who was arrested in Canada on December 1 and now awaits possible extradition to the United States. Meng allegedly concealed Huawei’s transactions with Iran in 2013, at a time when the activities were sanctioned by both U.S. and European authorities. Despite the Trump Administration’s insistence that the Meng case is entirely separate from the trade talks, China views it as inextricably linked; Huawei is a national champion in China, and is competing directly with American firms to build 5G infrastructure. Notably, Deutsche Telekom continues to partner with Huawei on building Germany’s own 5G network, although that could change. China has detained at least three Canadians in retaliation, complicating the extradition picture.
U.S.-E.U. Talks
The process between the United States and the European Union under the July agreement between Presidents Trump and Juncker remains in an early phase. An initial suite of agreements on technical barriers to trade — first expected in November and then in December — may slip into 2019. While the U.S. Trade Representative and the U.S. International Trade Commission both heard from stakeholders during the last week on a potential U.S.-E.U. agreement, the U.S. Trade Representative has still not published its negotiating objectives, which it must do at least 30 days before negotiations begin. On the European side, the European Commission must still secure a negotiating mandate. Hence, official talks will likely not begin for months. Progress on all these fronts is not made easier by recent public statements by U.S. Secretary of State Mike Pompeo, and U.S. Ambassador Gordon Sondland, harshly criticizing the European Union.
Meanwhile, the threat of automotive tariffs continue to put the German car industry on edge, as evidenced by the impact of a thinly sourced German news report on European auto stocks in late November. The U.S. Department of Commerce is said to be finished with its investigation and report, but U.S. law does not require the publication until mid-Feburary, after which Trump will have 90 days to decide whether to take action.
Ultimately, unlike other tariffs imposed to date, the auto tariffs may be illusory. There is no political constituency in the United States asking Trump to impose automotive tariffs, and virtually unanimous opposition to them. Any serious movement in that direction would immediately end the fragile truce with the E.U., thus jeopardizing the chance at a future deal. Senator Charles Grassley (R-Iowa), who will become Chairman of the Senate Finance Committee in January, has also stated that he wants to explore limiting the President’s authority to impose tariffs on national-security grounds, which effectively would remove that weapon from Trump’s arsenal. Unlike the first two years of the Trump presidency, Congress is poised to push back more on Trump’s instincts as the new 116th Congress begins next month.
Russia Sanctions
The U.S. Treasury announced on Wednesday that it will terminate sanctions on Russian aluminum giant Rusal within 30 days. In April, the Treasury had added Rusal and its parent company En+ to the list of specially designated nationals (“SDN List”) for being owned or controlled by Oleg Deripaska — a close associate of Vladimir Putin. The sanctions are considered to be the strongest since the 2014 Ukraine invasion. The deal, made possible through Deripaska’s significant divestments in Rusal, suggests that the U.S. Administration’s goal is to punish Deripaska, while minimally disrupting the global economy. Gaz Group, which operates joint ventures with Daimler AG and Volkswagen AG, remains on the sanctions list with a license lasting through March 7. Based on this week’s announcement, it seems likely that Treasury will ultimately terminate sanctions on Gaz Group as well.
Other Short Takes
- U.S.-German Relations. Susan Glasser has published a lengthy piece outlining the worsening relations between the United States and Europe, and particularly the strained bilateral relations between the leaders of the United States and Germany.
- 115th Congress. The 115th Congress is experiencing a last-minute spasm as President Trump yesterday refused to sign a bill to fund government operations from December 22 through February 8 — because it lacked funding for a border wall between the United States and Mexico. The bill had passed the Senate without objection on Wednesday night. As of Thursday evening, leaders had not reached an agreement to avoid a partial government shutdown. In general, the lame-duck session has otherwise been marked by little major legislation. The biggest surprise has been the advance of a reform to the criminal justice system, designed to reduce incarceration in the United States — which is virtually assured to become law. One bipartisan bill closely watched by the auto industry (on self-driving cars) will not make it to the White House this year.