US Fires Latest Shot In China Trade War: Warns Beijing Is "Threat To World's Trading System"

It"s been at least a few weeks since the topic of trade war with China dominated the news flow, so moments ago U.S. Trade Representative Robert Lighthizer decided to poke that particular wound, in during a speech in Washington said that "China’s coordinated effort to create national champions and distort markets is a threat to the world’s trading system."

Some headlines from his speech, via Reuters:

• USTR LIGHTHIZER SAYS THERE IS A GROWING FEELING AMONG VOTERS THAT GLOBAL TRADING SYSTEM NOT FAIR TO U.S. WORKERS


• USTR LIGHTHIZER SAYS "WE WILL HAVE CHANGE IN TRADE POLICY"


• USTR LIGHTHIZER SAYS U.S. CAN COMPETE IF CONDITIONS ARE FAIR


• USTR LIGHTHIZER SAYS HE AND TRUMP BELIEVE U.S. SHOULD BE MORE PROACTIVE IN TRADE POLICY, DEMAND RECIPROCITY


• USTR LIGHTHIZER SAYS HE AND TRUMP BELIEVE THAT TRADE DEFICITS MATTER


• USTR LIGHTHIZER SAYS SCALE OF CHINA"S EFFORT TO SUBSIDIZE INDUSTRIES IS A THREAT TO WORLD TRADING SYSTEM


• USTR LIGHTHIZER SAYS 301 PROBE INTO CHINA"S INTELLECTUAL PROPERTY PRACTICES COULD LEAD TO WTO CASES

Bloomberg provides some further details, quoting the US trade rep as saying that "WTO isn’t equipped to deal with the problem, and the U.S. must find other ways to defend our workers, companies and economic system." As a result, Lighthizer says "we will have change on trade policy", a statement that certainly did not come from the Goldman circle of close Trump advisors.

He also said that “the real policy difference is not over whether we want efficient markets, but how do we get them” adding that the US "must be proactive, as years of talking about the problems haven’t worked" and that “we must demand reciprocity.”

Finally, the US trade rep said that he agrees with President Trump that trade deficits matter and that he agrees macroeconomic factors have an impact on trade deficits, but terms of trade also matter.

In light of what Bank of America just said, namely that the fate of the ongoing game of chicken between the US and North Korea rests in the hands of China, and that any potential provocations by the US could result in a volatile outcome...

If China"s willingness to give more ground may be limited (even with the approach of its 19th Party Congress on Oct 18), the market is not pricing much in terms of the risk of a deterioration of the US-China relationship.... Washington has been threatening trade sanctions against China to force Chinese compliance on North Korea. We suspect an escalation of tension between Washington and Beijing would likely be accompanied by CNH weakening (intentional on the part of Beijing or not). 

... we eagerly await Beijing"s response to this latest escalation in (per) trade war tensions between the two economic giants.

Trump Trade Tsar Warns Of "Cataclysmic" Consequences If China Gets "Market" Status

Trump"s trade tsar, Robert Lighthizer, aka the US Trade Representative speaking before Congress on Wednesday, fired a warning shot at both Beijing and the World Trade Organization, warning that any decision to label China a “market economy” would have “cataclysmic” consequences for the body which has governed over international trade for decades. The statement comes in the context of a possible trade war over steel imports, further distancing the Trump administration from the WTO, and as UBS wryly adds, "President Xi of China may not be getting the return he expected on his investment of political capital in the US."

As the FT details, Lighthizer said the US was eager to see changes in the WTO’s dispute resolution system, arguing that the country had unfairly ended up as the top target for complaints in the global trade court. But the US trade rep singled out a dispute brought last December by China against the EU and US over whether it should be deemed a market economy as the “most serious litigation that we have at the WTO right now”.

“I have made it very clear that a bad decision with respect to the non-market economy status of China . . . would be cataclysmic for the WTO,” he said.

While the trade tzar did not elaborate what US action that would lead to and he added he was “assuming . . . that the WTO is going to do the right thing”, the warning pointed to how the Trump administration is changing the US relationship with the WTO and other multilateral institutions it helped create following the second world war.

As a reminder, designating China as a "market economy" would recognize its commitment to free market policies, and if China - whose import tariffs and protectionist measures are well known - were to win this qualification, it would make it more difficult for the U.S. to win cases the US brings against China for violations such as dumping steel, a practice China has regularly engaged in when prices drop low enough.

To be sure, Lighthizer has been a longstanding critic of the WTO and has argued for the US to take a far more aggressive approach in its relationship with both the WTI and China. In written testimony to Congress in 2010 he called for the US to end what he called its “unthinking, simplistic and slavish dedication” to WTO rules. Building on this, during his presidential campaign, Trump repeatedly threatened to pull the US from the WTO, although his stance has since softened. 

That said, there is good evidence that Lighthizer"s skepticism is justified: there is evidence that allowing China"s accession to the WTO fifteen years ago was the trade policy decision that most led to joblessness and stagnant incomes, specifically in the manufacturing sector. Or, as Barclays puts it, unleashed the current round of hyperglobalization...

... leading to stagnant incomes for the middle class.

The US Trade repo continued his criticism of China on Thursday, when he said he’d like to study the reason for Ford’s previously reproted plan to shift production of Focus-model cars to a Chinese factory and learn about its "incentives." Lighthizer, speaking before House Ways and Means Committee, said if it’s found that Ford made the decision for “non-economic reasons” then the administration "should take action."

Meanwhile, Beijing contends that the agreement when it joined the WTO in December 2001 was that it would automatically be awarded market economy status for the purpose of the calculations used in anti-dumping cases. Currently, its non-market economy status means that the US and other countries can use prices in third countries to determine the size of punitive tariffs used to combat dumping, or the selling below cost of products, by Chinese companies.

The aggressive push comes three months after Trump"s meeting with Chinese president Xi Jinping where Trump announced a 100-day plan to tackle trade issues and promised a friendlier tone if Beijing reined in North Korea. As part of that process Washington and Beijing announced an interim deal last month that allowed a resumption of US beef exports to China and paved the way for other measures including additional US LNG exports. Perhaps as a preemptive loophole, Trump tweeted earlier this week that China has failed to keep its part of the bargain and rein in North Korea.

Lighthizer said on Wednesday that this was just one strand of discussions and warned that many other tough negotiations lay ahead. Among the issues the US was now focusing on were new barriers to US tech companies doing business in China, he said. “The pressure is still on,” he said. “The trade deficit still hasn’t come down.”

And while trade with China remains a very open, and potentially escalating issue should trade war eventually break out as some suggest, a far greater problem for the US in terms of countering the impact of "globalization" looms elsewhere: robots.

US Vs Canada: The Numbers Behind the World’s Closest Trade Relationship

Whether we’re discussing the ancient merchants that traversed the legendary Silk Road, or the transfer of goods across modern border lines, trade has always been about building close relationships.

As Visual Capitalist"s Jeff Desjardins notes, there are many examples of strong and mutually-beneficial trade relationships all throughout history, but one doesn’t have to look far back to find what could be considered the closest bilateral relationship ever known: the one between the United States and Canada.

These two countries are each other’s best customers, and they share the world’s longest international border (5,525 miles long). They are both Western democracies with shared cultural heritage and similar standards of living – and each day, the two countries exchange a whopping US$1.7 billion in goods and services.

Our infographic today highlights numbers and tangible examples behind this lengthy relationship between the U.S. and Canada.

AMERICA’S BEST CUSTOMER

Despite China surpassing Canada in 2015 to become America’s largest trading partner in aggregate, the majority of Chinese trade comes in the form of imports ($462B imports vs. $115B exports). That means China is actually only the third-largest customer of American-made goods, buying about 8% of total U.S. exports in 2016.

The largest buyer of American goods is still north of the border – in fact, Canadians buy about 18% of total U.S. exports, which is more than twice that of China.

Canada is the most important international customer for 36 states – and every day the equivalent trade of all U.S./Japan happens over just one bridge (Ambassador Bridge) between Detroit, MI and Windsor, ON.

CANADA’S BEST CUSTOMER

Americans return the favor in a big way: an incredible 76% of Canadian exports are bought by Americans.

It’s estimated that 78% of Canadian exports to the U.S. are raw materials, parts and components, and services used to create other goods in the United States.

CLOSE TIES

Through many years of trade, the supply chains between the two countries have become highly integrated.

Much of the time, the U.S. is buying raw materials and intermediate goods, which get used in final products destined for domestic and global markets. Many of those even get sold directly back to Canada.

This could be buying Canadian crude to reduce reliance on OPEC, importing low cost hydro electricity during times of heavy rainfall, or using Canada’s steady supply of aluminum to make more environmentally sound vehicles.

Few countries in the world have this kind of economic interdependence – and the history, integration, and value of goods traded makes this arguably the world’s closest bilateral trade relationship.