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Congress Is About To Give Trump More Trade Discretion

By Marc ChandlerMarket OverviewJul 02, 2018 02:12PM ET
www.investing.com/analysis/congress-is-about-to-give-trump-more-trade-discretion-200328965
Congress Is About To Give Trump More Trade Discretion
By Marc Chandler   |  Jul 02, 2018 02:12PM ET
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Predictably, even controversially, each of the three premises of the US trade policy has been undermined. First, the US tariff schedule is low, but it is not the lowest in the world. Yes, it does have a low 2.5% tariff on auto imports, but there is a 25% tariff on SUVs.

Second, the steel and aluminum tariffs are unlikely to reduce the US trade deficit. Even if there is some import substitution effect, the higher prices can be expected to reduce demand. The main driver of the US trade deficit is the strength of the US economy. The mature business cycle was given significant fiscal stimulus. The May trade balance will be reported later this week but in the first four months of the year, the US shortfall is averaging $50.5 bln compared with $45.3 bln in the year-ago period and $40.9 bln in the Jan-April period in 2016.

Third, and related, contrary to administration assurances, countries are indeed retaliating. Canada's actions went into effect on July 1. The impact of the countervailing tariffs need to be incorporated into the cost-benefit analysis. The EUs have already been implemented. At the end of the week, the US and China will be imposing tariffs on $34 bln of each other's goods.

The US continues to threaten to take another step on the escalation ladder. Auto imports are under investigation on national security grounds. The amount of trade that could be impacted dwarfs the other sectors that have been impacted by a revival of American economic nationalism.

Last week's decision by the Trump Administration not to pursue plans to boost restrictions on Chinese investment is a Pyrrhic victory for what passes as the free-trade wing of the administration. Despite the criticism of the administration's trade policy, Trump enjoys a high level of support within the Republican Party. Some are not keen on treating Canada, Europe and Japan as threats to national security,

Despite these reservations, Congress is about to give the president a powerful weapon. With the help of the US Treasury and Commerce Secretaries, Congress has passed a bill that will strengthen the current review process of the Committee on Foreign Investment in the United States (CFIUS). Technically, CFIUS is an advisory body for the president. The bill is working its way through the reconciliation process.

It will give Trump the kind of authority that others had thought required a new process. Going forward, CFIUS will have the authority to block not only majority owned acquisitions but also minority stakes (25% when the foreign entity is 25% owned by a foreign government). It will also be able to block joint ventures, which had been used to circumvent scrutiny. Start-ups and real estate investment also will come under the purview of the committee. It also makes the export control regime more robust.

The US has not waited for a stronger CFIUS. It has used the existing mechanism to formally block two foreign acquisitions, including most recently Broadcom's (NASDAQ:AVGO) attempt to take Qualcomm (NASDAQ:QCOM). There have also been many offers that were withdrawn before a formal decision was made. There has been a general cooling of Chinese direct investment in the US in H1 18, with some industry estimates suggesting it has fallen by 90% year-over-year.

There were not objections raised by Congress so as of July 1, Trade Promotion Authority, in which congressional authority to regulate commerce is deferred to arguably a large extent to the executive branch until 2021. Although many portray Trump as extreme on trade, House and Senate Republicans remain highly supportive. Brady, the chair of the powerful House Ways and Means Committee was quoted saying, "We support the president’s challenge to China and others on unfair trade practices." Brady's language also confirms that while China's trade practices are bothersome, the Republican Party supports a broader reassertion of American economic power. Trump's claim that the EU is almost as bad as China may not be far from where a new consensus may be emerging. Still, the red line for Congress may be the threatened auto tariff or a NAFTA/WTO withdrawal.

Still, US appears poised to antagonize China in a different way. There are a few possible actions that could materialize in the coming week which would irk Chinese officials. Reports indicate that the US State Department requested marines be sent to Taiwan to ostensibly guard the US diplomatic power there. If the request is granted, it would be the first time in 40 years that the US had marines in what China says and the US officially recognizes as a province of China.

There are also officials advocating sending a warship there the Taiwanese Straits, which the US did last July. There are some who are advocating a more provocative step--sending an aircraft carrier, which it has not done since 2007. While perfectly within the US right, of course, it would be as if China or Russia sent a military ship into the Caribbean.

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Congress Is About To Give Trump More Trade Discretion
 

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Congress Is About To Give Trump More Trade Discretion

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