Summer of Protectionism?

The Takeaway

The Trump administration appears to have moved away from its protectionist threats of broad-based tariffs in favor of pragmatic dealmaking when it comes to the major actors, China and Mexico, whom the President castigated on the campaign trail. That said, Trump will complete his first 200 days in office on August 7 and, if nothing else, this is a President who wants to put “wins” on the board when it comes to living up to campaign promises. The administration seems likely to move forward with targeted protectionist measures aiding the steel and aluminum industries (e.g. the pending Sec. 232 national security investigations) as well as a raft of anti-dumping / countervailing duty investigations backed by domestic producers in sectors ranging from softwood lumber to biodiesel. Additionally, the administration is still pushing the notion of “reciprocal taxes,” which could gain momentum after reports due June 29 (on nations with significant surpluses in goods trade with the US) and October 26 (on trade agreement “violations and abuses”). However, we believe the White House is more likely to use such reports for leverage in talks with NAFTA trading partners as well as potential subsequent talks with the EU, South Korea, and Japan, among others regarding new / revised trade accords. In this note, we discuss these and other key dates for investors to watch this summer and fall.

Threats made, not implemented. No 45% tariffs on Chinese imports or 35% tariffs on Mexican imports; no 35% “border tax” on US companies that open plants abroad in order to ship back into the US at lower cost; no labeling China a currency manipulator – instead we have a “100-day plan” to open market access for both US and Chinese interests. A lower proposed 5-10% tariff on a broad base of imports fell off the radar screen, and the Trump administration backed off its earlier, tentative embrace of the House GOP’s border adjustment tax (BAT) that would raise the cost of imports if the dollar did not appreciate quickly enough. The concept of “reciprocal taxes” remains in its in infancy; Commerce Secretary Wilbur Ross acknowledged such a proposal could run afoul of “most favored nation” rules binding WTO member nations, and reworking the WTO rules (Ross’s preference over withdrawal from the organization) could take years. Meanwhile, yesterday Ross brokered a deal in principle on Mexican sugar that obtained more favorable treatment for US producers without resorting to punitive tariffs and a likely tit-for-tat trade war, which augurs well for NAFTA renegotiation beginning in August.

Industrial heartland still waiting for “wins.” Trump’s constituency in Rust Belt swing states such as Ohio, Michigan, and Pennsylvania that carried him to victory last November have not yet seen the concrete evidence that the President will be, as he said last week, representing the interests of voters in Pittsburgh, not Paris. With his first 200 days coming to an end on August 7 and legislative wins few and far between as Congress prepares to depart for the August recess, we think protectionist rhetoric will pick up and include pending “national security” safeguards on steel and aluminum imports likely to be imposed under Sec. 232 of the Trade Expansion Act of 1962. During his campaign, Trump also said he would look to other statutes such as Sec. 201 (broad safeguards to protect against import “surges”) and Sec. 301 (defense against “unreasonable or discriminatory” acts that “burdens or restricts United States commerce”) of the Trade Act of 1974, particularly with regard to China’s trade practices. Reports due to the President regarding major causes of the US trade deficit (June 29) and on violations of various trade commitments by WTO members (October 26) could generate headlines at least and also pressure Trump to take further action.

Steel, aluminum 232 reports in focus – targeted for end of June release. We expect the Commerce Department will issue reports by month’s end determining that a range of steel and aluminum products represent a national security threat to the US, recommending a strategy of seeking voluntary restraint agreements (VRAs) to hold back exports from trading partners, tariffs, and/or quotas. President Trump would then have 90 days to decide on a course of action. “I look forward to reading the [DOC] analysis of steel and aluminum – to be released in June. Will take major action if necessary,” Trump tweeted on May 27. The phrase “if necessary” should not be discounted, as we’d look first for the administration to try to secure VRAs (such as those in place for steel imports from Japan and Europe for much of the 1969-1989 period, as well as a machine tool VRA negotiated by the Reagan administration in response to a Sec. 232 finding in 1986).

National security or domestic protection? If Trump tries to take more aggressive action, such as imposing quotas or tariffs similar to those put in place by President Bush under Sec. 201 (up to 30%), we expect a WTO challenge to the “national security exception” under Article XXI of the General Agreement on Tariffs and Trade (GATT). Although Trump is using a different statute than Bush (whose tariffs were ruled illegal by the WTO within 18 months), we think ultimately the US case would be fairly weak, particularly for steel. (Aluminum may have a better shot, as industry woes have left only one US smelter – CENX’s Hawesville, KY facility – for production of high-purity aluminum used in military aircraft.) Commerce found no national security threat on a similar Sec. 232 petition brought in 2001 by a pair of Democratic congressmen. Although security exceptions under Article XXI received broad deference over the years, generally such actions came in response to real or perceived security threats (such as US embargoes of Cuba in 1962 and Nicaragua in 1985, a 1982 European-Canadian-Australian embargo on Argentine imports stemming from the Falkland Islands / Malvinas conflict, and two prior uses of Sec. 232 authority, US embargoes of Iranian oil in 1979 and Libyan oil in 1982). In 1975, Sweden imposed a global footwear quota for reasons trading partners considered domestic protection dressed up as a national security claim, but Sweden lifted the restrictions in 1977 before a case was brought. In any case, as demonstrated by the Bush steel tariffs in 2002, it can take many months if not years to work through WTO cases and, in the meantime, Trump could act freely (subject to likely retaliation against US goods ranging from arms exports to agricultural products).

Appendix. Trump Trade Policy Actions & Upcoming Milestones

Appendix 1

Appendix 1.1


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