Media  Global Economy  2019.07.17

Trump cannot raise auto tariffs: Dealing with Mexico and raising auto tariffs are one thing; engaging in a trade war with China is another

The article was originally posted on RONZA on June 27, 2019

On June 16, I visited Washington to meet my friends in the US government, the Congressional Research Service, universities, and think tanks there. We discussed a wide range of issues with special focus on trade and agriculture after assessing and analyzing the situations the Japanese and US governments and economies are in. Among the topics were the possibility that the Trump administration will raise auto tariffs and where Japan-US trade talks are headed.

Fortunately, I have experience participating in trade negotiations in the WTO, OECD, and APEC as a representative of the Japanese government. I also have a certain level of knowledge of free trade agreements such as the WTO pact and the TPP. And I am capable of legal and economic analysis. Thus, whenever I tell them that I will visit Washington, they are happy to meet me.

They want to know the situation in Japan and my analysis of it in much the same way as I want to know the situation in the US. We are in a give-and-take relationship. No one wants to take precious time to meet a Japanese unless he will get something in return. And this is the same with me.

Some of them asked me to act as a Japanese negotiator in an effort to simulate ongoing Japan-US trade talks. They wanted to know how the Japanese government might react to such and such demands. We primarily had debates rather than merely exchanging views. This provided some opportunities to identify important facts and issues.

The Trump administration's shift in trade policy

In my earlier article "Trump's changes in US trade policy have put Japan in an even better position in bilateral talks" (May 24, 2019), I described the Trump administration's two actions--lifting tariffs on steel and aluminum from Canada and Mexico, and postponing for 180 days the judgment of whether to raise auto tariffs on account of defending national security--as representing a shift in trade policy by the administration.

At the beginning of June, another major event occurred on the trade front.

Exasperated by the lingering issue of illegal immigrants to the US via Mexico, President Trump pressured the Mexican government for action by setting out a policy that slaps a retaliatory tariff of 5 percent on all imports from Mexico effective from June 10 and will increase it in steps to as high as 25 percent by October. On June 7, however, Trump postponed the imposition of the punitive tariff indefinitely, saying that Mexico agreed to take new measures to block illegal immigrants.

Based on the discussions with my friends in Washington, this article aims to demonstrate two things: (i) that this move in relation to Mexico is yet another piece of evidence that the Trump administration has changed its trade policy as explained in my earlier article mentioned above; and (ii) that, for the Trump administration, dealing with Mexico and raising auto tariffs are different from dealing with China.

Trump in a predicament

Before demonstrating these two points, let me first touch on two major events that occurred while I stayed in Washington.

The first one was a remark Trump made during an exclusive interview with ABC News. Asked what he would do if a foreign government offered him information on his rivals in the 2020 election, Trump answered that he would take it and then report it to the FBI. He came under extensive criticism. Some questioned why he would take it and not alert the FBI right away. Others equated taking such information with condoning election interference by foreign countries, as in the case of the alleged interference by Russia in the 2016 presidential election.

The other major event was that the Trump campaign's internal polling was leaked to ABC News, resulting in the firing of some of its pollsters. This polling showed that Former Vice President Joe Biden, a Democratic candidate, was far ahead of Trump in such swing states as Florida, Wisconsin, and Pennsylvania by a margin of around 10 percentage points. This suggests that the presidential election will be an uphill battle for Trump.

Given these circumstances, what will Trump do about raising auto tariffs?

This issue is not only a concern for the Japanese auto industry; it will also sway the Japan-US trade talks, the launch of which Japan was forced to swallow under threat from Trump.

Bipartisan hardline stance toward China

Let us first look at how the US is dealing with China.

Trump is not alone in taking a hardline stance toward China. Senate Minority Leader Chuck Schumer (D-NY) strongly supports Trump in his uncompromising stance toward China, even though he has always been at loggerheads with the President with regard to almost all other issues.

There is bipartisan support for the claim that China is trying to become a hegemonic state by stealing US technologies. Among the hardliners on China within the Trump administration are White House Director of Trade and Manufacturing Policy Peter Navarro and US Trade Representative Robert Lighthizer.

Although Trump instigated a trade war with China by raising tariffs on Chinese goods, the trade war removed the lid on Washington's anti-China sentiment, which is far more entrenched than the resentment toward China on the part of Trump, who makes an issue of only the US trade deficit with China. US Vice President Mike Pence was planning to deliver an address harshly critical of China three days before June 28, the first day of the two-day G20 summit. But he cancelled it after a meeting between Trump and Chinese President Xi Jinping was arranged.

A US expert told me that Trump is most drastic at the tactical level but most flexible at the strategic level. If Beijing proposes buying more US farm produce, Trump might lay down arms, saying that that will improve the US trade deficit with China.

But everyone except Trump in the administration will continue the hardline stance on China unless Beijing promises to address structural issues such as protecting intellectual property rights, stopping forcing US companies to transfer technology, reducing industrial subsidies, and reforming state-owned enterprises. Also, it is unlikely that China will make any concession on these issues since doing so concerns the institutional aspect of the Chinese Communist Party. Even if some progress is made in US-China talks, chances are slim that tit-for-tat tariffs will be terminated.

Across-the-board tariffs on imports from China clearly mean more burden on US consumers but have not invited major opposition, although Apple is making an issue of the matter.

How the Mexico issue and the auto issue differ from the China issue

What about imposing tariffs on automobiles and raising tariffs on goods from Mexico?

For Trump, who is most concerned about US trade deficits, Mexico is no different from the other three of the top four countries with which the US has a trade deficit: China, Japan, and Germany. Trump considers these four countries to be despicable because they have been illegitimately stealing US jobs.

From his perspective, Mexico has been robbing the US of jobs through not only a trade deficit but also the inflow of immigrants. Trump harbors a sense of having been victimized by Japan, which exported large amounts of automobiles to the US during the 1980s and 1990s, resulting in the US incurring a huge trade deficit. He has even more warped feelings toward Germany. As a child, Trump saw wealthy residents in Manhattan in New York City driving Mercedes-Benz. With an envious look, people in the neighboring district of Queens where he was brought up drove Ford or GM.

For everyone except Trump within the administration, Mexico, as well as Japan and Germany, which are subject to tariffs, is a US ally. For example, Robert Lighthizer and Jared Kushner, senior advisor to Trump, his father-in-law--two of the typical hardliners on China--opposed the idea of raising tariffs on goods from Mexico, one of the largest US trade partners, saying that that would take its toll on both the US and Mexico, according to the Wall Street Journal (dated June 11). Lighthizer and others do not seem to raise such objection in the case of China, an equally important trade partner.

Bipartisan objection to higher auto tariffs

As I described in "Trump's changes in US trade policy have put Japan in an even better position in bilateral talks" (May 24, 2019), another factor is the bipartisan Congressional opposition to the fact that Trump is taking the liberty of exercising the powers to address tariff and trade issues, which intrinsically rest with Congress, as well as the budgetary powers, thus encroaching on all these powers.

In a bid to keep his campaign promise to build a wall on the Mexican border to stem the inflow of illegal immigrants, Trump declared a state of national emergency to redirect part of the Congress-approved defense budget to fund the wall's construction. In response, Congress passed a resolution against the national emergency declaration with some of the Republicans--who control a majority in both houses--breaking away from the party line. Trump planned to slap punitive tariffs on Mexico by declaring a state of national emergency,too.

Senator Mike Lee (R-UT) contributed to USA Today on June 18 and argued that Congress should take back the trade negotiating powers from the President. The line of division over trade issues is between Congress and the executive branch, not between Democrats and Republicans. Logically speaking, Congress should be opposed to raising tariffs on China but it is not. By contrast, Congress is showing bipartisan opposition to higher tariffs on Japan and other US allies as well as to higher auto tariffs, to which the auto industry itself is opposed.

Detrimental effects on the real economy

The final factor is the impact on the real economy.

There was opposition to new levies on Mexico as they will prove to be multiple levies for the auto industry because parts go back and forth over the national border many times. Slapping on new tariffs would have run counter to the move to seek Congressional approval of USMCA, a revamped version of NAFTA (North American Free Trade Agreement), in order to promote free trade. Mexico might have taken the retaliatory measure of imposing levies on US farm produce.

Higher tariffs on auto and its parts which lead to higher costs and prices of automobiles will deal a blow to the steel industry--which is breathing a sigh of relief thanks to the newly-imposed steel tariffs--through lower steel demand by the auto industry. This will take its toll on the Midwest's Rust Belt, which in turn will affect the chances of Trump being reelected. In addition, since automobiles are final consumer goods, higher auto tariffs will affect not only industry--notably many car dealers across the US--but also consumers eventually. This will turn many voters away from Trump.

A friend of mine pointed out that if car dealers put up a price tag of, say, an intrinsic car price of 2 million yen plus a Trump tariff of 0.5 million yen, Trump would retract the tariff. My friend added that Trump would not do things that would invite such a state of affairs in the first place. A university professor, who supports the Democratic Party, told me that she planned to write an article showing that auto tariffs will adversely affect consumers, but eventually decided not to do so after concluding that higher auto tariffs will surely help to defeat Trump in the election.

Of course, Trump is unpredictable. Yet, given that he retracted the punitive tariff on Mexico, it seems more unlikely that he will raise auto tariffs. At least, that is what everyone except Trump within the administration must be thinking.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "RONZA" on June 27, 2019.)