US: Trade Tariffs Are Coming

Published on March 7, 2018

The White House announced President Trump intends to move forward with an announcement on proposed steel and aluminum tariffs, and Treasury Secretary Steven Mnuchin has confirmed the Administration is scrambling to get the finishing documents for the tariffs policy ready by tomorrow afternoon.

*** While this is a “still evolving” policy, and with the caveat he could always change his mind on either timing or content, President Trump is determined to indeed sign the tariffs order as early as tomorrow afternoon, and which now seem likely include the carve outs for allies such as Canada. Markets are relieved that the tough talking President is indeed not engaged on a maniacal spiral towards global trade wars, and the conciliatory gesture could very well bring to conclusion the to-date badly stalled NAFTA talks with Mexico, and particulary with Canada. But any complacency there won’t be any tariffs at all is misplaced. ***

*** The real target is and remains China, and on that score the White House has quietly escalated its threats to include potential movement on intellectual property rights, by far the biggest bilateral issue between the two countries, and dwarfing anything on steel or aluminum in significance. Both sides are keenly aware of the potential backlash and danger in pushing and applying more pressure there on Beijing (see SGH 3/6/2018, “China-US: Trade Talk Limbo”). ***

*** The political imperative of delivering more specific results on campaign promises on trade in light of the threat of Republican losses in the November midterms should not be underestimated. Likewise, despite some pushback by the Republican leadership on Capitol Hill, the willingness of Congress to block further action on trade tariffs, such as the proposal to wrest power from the executive to Congress by Utah Republican Senator Mike Lee, should not be overestimated. ***

One last note, the resignation of NEC Director Gary Cohn, while rumored on and off ever since the Charlottesville remarks, was triggered by very real policy differences within the White House that suggests ongoing tensions and uncertainty over multiple policy fronts, not just the final form of the current trade policy stance.

A Determined White House

First, the big picture: the President and certainly no Republican wants to trigger a trade “war” that could threaten the economy or a market collapse. The aim is to correct what are perceived to be unfair trade practices working against US competitiveness.

Trump himself, flanked by Commerce Secretary Wilbur Ross and Treasury Secretary Steve Mnuchin, have waved that flag loud and clear. But if there is market turbulence, it would be better to take that hit now rather than closer to the November elections.

And just as markets were wrong footed through 2017 in underestimating the existential need for the President and the GOP to notch a win on tax cuts, the markets similarly are now consistently underestimating the White House determination to secure a trade policy “win” on campaign promises in the run up to the mid-term elections in November. That need is especially pressing with the growing sense across Capitol Hill and both parties that the House could flip to Democratic control.

Similarly, markets are grossly overestimating the willingness, or ability, of Congressional Republicans to block any movement on tariffs. Indeed, through all their warnings, and the initial distancing away from the White House, the GOP “free traders” have been careful to phrase their resistance in terms of moderating, not  blocking, the President’s political trade agenda.

Understanding the need to give the President some victory on trade, there is one thing all of Congress, even Democrats, can agree on; that China is indeed a “bad actor” on trade who somehow needs to be punished, hopefully without too much fallout. On cue, Trump raised today the specter of action beyond aluminum and steel on intellectual property rights, a far more significant potential escalation for Beijing (see SGH 3/6/2018, “China-US: Trade Talk Limbo”).

The Lee Legislative Proposal

On the heels of the exhortations by House Republican Majority Leader Paul Ryan and House Ways and Means Committee Chairman Kevin Brady for President Trump to tread lightly on his threats of tariffs, Utah’s Republican Senator Mike Lee has proposed a bill to essentially wrest trade tariff level-setting control from the President to Congress. We would take it with a grain of salt.

The proposed legislation, which would strip the President of executive powers over trade, has little to no political appeal for the GOP majority and is too complicated to boot. Indeed, the only way for the Senator to win adoption of such a policy, if the intent was that strong to begin with, would have been to spring it on the President, rather than telegraph it to all the news outlets first in town.

Having said that, there is still some chance the Republican-controlled Congress could stage a mini-revolt in a show of support of free trade, especially if the GOP leadership senses a need to distance the GOP from the White House if the politics of the tough trade stance spirals out of control. That would likely take the form of legislative language challenging Congressional funding of any offensive trade policy, take your pick.

In practice the wording of such a bill could entail, for example, a limitation on spending amendment to an appropriations bill, “no funds appropriated by this act may be expended to implement [fill in blank].”

But it would still be a bill that would ultimately be meaningless beyond the open political signaling of a break between the GOP on Capitol Hill and the White House. What’s more, Trump may modify his tariffs on his own, or not, or he may shift them in every new conversation, or not. Commerce Secretary Ross said as much the other day, and got mocked, but he is correct. The least likely outcome is that Congress will do something unilaterally to stop Trump.

An Eye on November

Granted, a critically important set of swing voters from the 2016 Trump victory may recoil at any excessive pounding on the table by the anti-free-traders. That becomes an important political calculation in the current politics of trade tariffs and threats, with the focus on suburban voters who, with the Republicans clearly dominant in the rural areas, and the Democrats the cities, will decide who wins the US House and Senate races this fall.

Ultimately, however, the GOP leadership is afraid of challenging Trump directly. And the Democratic leadership is still reluctant to confront the trade issue in those districts where an anti-free trade attitude dominates – concentrated in the industrial belts of the Northeast and Midwest — and which happen to be about a third of the congressional districts the Democrats need to win to take back the Speaker’s gavel.

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