Further to our earlier post, here are some thoughts on Friday’s trade developments with respect to the Section 232 Auto/Auto Parts investigation and the prospects for the USMCA:
(1) the 6-month delay in the Section 232 Auto/Auto Parts investigation makes sense given where we are with China. If the US imposes import restrictions on autos/auto parts now, the retaliation will be several times larger than what was imposed on U.S. exports after the U.S. imposed the Section 232 duties on imported steel and aluminum. Given where the negotiations are with China (near the end; although a deal is far from guaranteed), it makes sense to buy a few months here (i.e., it is worth delaying opening a new front in the trade war if you can resolve the front you are currently fighting on first).
(2) it is far from certain that the EU and/or Japan (and any other country the USTR opens negotiations with – e.g., China on auto parts?) will be willing to enter into an agreement that “limits or restricts” exports of autos/auto parts to the United States (e.g., a voluntary export restraint agreement, which are frowned upon under the WTO rules). Even if they were willing, 6 months is not a lot of time to negotiate such an agreement. The 6-month period expires less than one year from the next presidential election, which makes for interesting timing (e.g., will the Administration be willing to increase the cost of cars sold in the United States (whether imported or domestic) by several thousands of dollars each, and have billions of dollars of U.S. exports subject to additional duties by our major trading partners, in a presidential election year?).
(3) the stated rational for justifying import restrictions on autos/auto parts (i.e., American-owned producers are selling less than they otherwise would due to increased import competition and restrictions in foreign markets and are, therefore, spending less on R&D. Automotive R&D is important to U.S. national defense. Thus, we will impose import restrictions so American-owned producers can sell more and have more money to spend on R&D) can be applied to almost any industry to justify import restrictions – e.g., semiconductors, pharmaceuticals, life sciences, medical devices, aerospace, high tech manufacturing, robotics, etc. Who will be next? The stated rationale is also questionable economically – does increased competition cause companies to invest less in R&D, or more? Stated differently, do companies protected by import restrictions have an incentive to keep innovating, or does competition force companies to keep innovating to survive in the market?
(4) the lifting of the Section 232 steel and aluminum duties on Canada and Mexico signals just how much the Administration has invested in passage of the USMCA. The United States was willing to lift the additional duties without explicit quantitative limits on imports from Canada and Mexico (although, we suspect that the parties have a clear understanding of what “historic volumes” means and will all be closely monitoring shipments) in exchange for movement on passage in Canada and Mexico (to increase pressure on Congress to do the same). Given the USMCA’s focus on automotive rules of origin, the delay in the Section 232 Auto/Auto Parts investigation likely means the Administration will only get conditional (i.e., tepid) support from the automotive industry (which is generally opposed to the duties or other restrictions being imposed under Section 232), until the issue is resolved. Given the timing for resolution (i.e., November 2019), it does not help the chances of passage.
The next few months will be even more interesting (if that is even possible). Stay tuned!